US and global benchmark crude entered bear market territory on Tuesday, just five trading days after reaching their highest prices since 2008.
“The crash was spectacular,” said Fawad Razaqzada, a market analyst at ThinkMarkets, in his market review.
In Tuesday trading, the April West Texas Intermediate CL.1, -6.00%, CLJ22, -6.00% crude futures contract for early month delivery fell $8.81, or 8.6%, to $94.20 a barrel on the New York Mercantile Exchange. This is 24% less than the March 8 settlement of $123.70, the highest since August 1, 2008.
May Brent crude BRN00, -5.94% BRNK22, -5.94% lost $8.04, or 7.5%, to $98.86 a barrel on ICE Futures Europe. This is a 23% decrease from the March 8 settlement of $127.98, the highest result since July 22, 2008.
Technically, a bear market is typically characterized by a fall of 20% or more from a recent high, and if WTI settles at or below $98.96 and Brent at or below $102.38, according to Dow Jones market data, both companies will enter bear market.
Brent oil futures reached an intraday high of $139.14 on March 7 and settled at $127.98 on March 8, the highest level since 2008.
Think Markets
This will be the fastest drop in WTI from a recent high into bear market territory since April 2020, when prices only took one day to move into bear market territory. For Brent, this will be the fastest bear market decline since 1996, when it took five trading days to enter a bear market.
The main driving force behind the oil sell-off was “the realization by investors that Europe is not going to immediately cut off Russian oil supplies,” Razakzada said. “Everything else is secondary, including the potential return of Iranian oil supplies.”
Iran and world powers have been trying to negotiate a renewal of the 2015 nuclear deal, which was aimed at limiting Iran’s nuclear activities. The deal will likely lift some US sanctions on Iran, allowing it to supply more oil to the global market.
Russian Foreign Minister Sergei Lavrov told his Iranian counterpart on Tuesday that negotiations to renew the agreement were nearing completion, Reuters reported.
Meanwhile, the Organization of the Petroleum Exporting Countries “highlighted the risk to the oil demand outlook posed by the war in Ukraine and rising inflation,” he said.
In its monthly report released on Tuesday, a group of major oil producers said it left its economic forecasts and estimates for crude oil supply and demand growth in 2022 “underestimated.” He warned that inflation caused by the war between Russia and Ukraine could undermine oil consumption.
“In addition, oil prices have been affected by what drove prices down last year: the rise in COVID cases and lockdowns,” Razakzada said. “This time in China, the world’s largest oil importer.”
China’s southeast manufacturing hub in Shenzhen, near Hong Kong, has been put on lockdown due to the COVID outbreak, in addition to the COVID lockdown in the country’s northeast.
For now, however, Russia’s ongoing incursion into Ukraine “is likely to cause even more disruption to global trade, if not to direct energy exports,” Marshall Steves, energy markets analyst at S&P Global Commodity Insights, told MarketWatch.
Thus, “upside risk remains, and the current correction [in prices] it appears to be profit taking motivated by concerns about Chinese demand,” he said.
Given the sharp drop in oil prices, Razaqzada said the oil market could “see a bit of a discount hunt at these levels, especially as the threat of supply disruption from Russia remains high.”
However, “we need to see signs of a rebound first, ideally on a daily basis, before bullish speculators start to put their fingers down,” he said.