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Oil struggles to hold gains after Fed promises aggressive action

Oil prices moved lower on Monday, struggling to hold onto gains notched after the Federal Reserve pledged aggressive asset purchases to support markets, and extending last week’s decline, which was U.S. West Texas Intermediate crude‘s largest since 1991.

WTI fell 2.65% to trade at $22.03 per barrel. In a volatile session for the contract, prices were down 6% in early trading before rising as much as 4% following the Fed’s announcement. International benchmark Brent crude traded 5% lower at $25.64 per barrel.

The COVID-19 outbreak and subsequent business slowdown has sent the Dow Jones Industrial Average and S&P 500 tumbling into bear market territory, but investors are hoping that the Fed’s latest actions will support the economy as the virus rages on.

On Monday the central bank said it will continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions.

Traders are hoping that this additional support will put a floor under oil prices, which have been hit especially hard by the coronavirus outbreak. WTI crude futures have been cut in half this month as a travel slowdown eats into crude demand, just as powerhouse producers Saudi Arabia and Russia prepare to ramp up production.

The rapid decline in prices has wreaked havoc in other areas of the financial markets, as investors have been forced to sell other other assets such as Treasuries or equities indiscriminately to cover losses in their energy positions.

Ed Morse, Citi’s global head of commodity research, believes there’s more downside ahead. He’s forecasting crude below $20 per barrel for much of the second quarter.

“I think it can go much lower,” he said Monday on CNBC’s “Squawk Alley.” “We don’t think the one-two punch is over, particularly on the demand side where the impact on transportation fuels in Europe and the U.S. is just beginning.”

The fast-spreading virus has now infected more than 350,536 people worldwide, according to Johns Hopkins University, and killed at least 15,328 people. More than 100,000 people of that tally have recovered, according to Hopkins.

As traders attempt to quantify what increasingly strict travel restrictions and stay-at-home mandates will mean for longer-term crude demand, prices have swung in either direction.

On Wednesday WTI dropped 24.4% to a more than 18-year low, in its third worst day on record. One day later, prices snapped back, surging 23.8% for the largest percentage gain in history. Given WTI’s 60% decline this year, a smaller gain, of course, now accounts for a much larger percentage move. But the volatile swings are notable.

Just as demand drops, the OPEC+ production cuts currently in place expire at the end of the month, meaning nations will soon be allowed to pump as much as they please. 

Saudi Arabia has announced plans to increase its daily production to a record 12.3 million barrels per day in April. By comparison, the kingdom pumped roughly 9.7 million bpd in February. Russia is among the other OPEC+ nations that has said it, too, could ramp up production.

“With each day there seems to be yet another trapdoor lying beneath oil prices, and we expect to see prices continue to roil until a cost equilibrium is reached and production is shut in,” said Rystad Energy analyst Louise Dickson.

“This is the most dismal oil demand picture we have witnessed in a long time with a simultaneous collapse in jet fuel, gasoline, shipping fuel, petrochemicals, and oil used for power generation,” she added.

WTI has dropped 43.9% in March, putting it on pace for its worth month on record, back to the inception of the contract in 1983. The contract is squarely in bear market territory, currently trading 66.32% below its most recent 52-week high of $66.60 hit on April 23, 2019.

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