Oil prices fell to the lowest levels seen since 2002 as the coronavirus pandemic eroded demand for travel and prompted fears of a global recession.
West Texas Intermediate fell 11.6 per cent to $23.82 at 5.12pm UAE time – the lowest level seen since May 2003. Brent, the most widely-used benchmark, was down 5.7 per cent at $27.10 per barrel.
The slump came as oil producers in the Gulf pledged to step up their exports next month, with Saudi Arabia expected to contribute 10 million barrels per day.
The kingdom said it would operate at its full capacity of 12m bpd from April onwards and supply an additional 300,000 bpd from its inventories. Abu Dhabi is also expected to bring 4m bpd in supply to the market, which has seen demand languish as populations remain in lockdown and factories continue to be shut across most of Europe.
Meanwhile travel restrictions, particularly transatlantic bans, have prompted the airline industry to cut flights, further curbing demand for fuel. Quarantine and remote working measures have also contributed to the slowdown in demand for public and private transportation.
Parallels are already being drawn to the price slump between 2014-16, which squeezed upstream industry spending and forced many independent shale producers out of business.
"The convergence of geopolitics, economic slowdown, and the Covid-19 pandemic should keep oil prices low for a long while from here. High-cost producers are in trouble, especially the shale gas industry in the US, which went off rails similarly in 2014," Indian ratings agency Crisil said in a note on Wednesday.
If prices hover in the $35 to $40 range, shale's expected incremental output of 1.5m to 2m bpd may not materialise over the next three to four years, the report added.
Shale producers can currently sustain production at an operating cost of $25 to $35 per barrel, but this may prove challenging as WTI drops below $24 per barrel.
More supply is expected to flood the market as Saudi Arabia has indicated that it was preparing to keep its pumps at full capacity and draw on inventory as long as possible with plans to even increase capacity by an additional 1m bpd to 13m bpd.
Saudi Aramco, the world's largest oil-exporting company, said in an investor call on Monday that it was "comfortable" with $30 oil prices and could maintain its shareholder commitments even when prices go lower.
Goldman Sachs meanwhile, lowered its yearly forecast for crude to $20 per barrel from $30 per barrel, slashing its forecast for the second time in two weeks.
"Covid-19 is driving second-order effects in both commodity and equity markets that are creating outcomes which far exceeded our negative views from last month," Goldman Sachs analyst Jeffrey Currie said in a note on Tuesday.
Stocks also suffered their worst rout in more than three decades with the Dow Jones Industrial Average closing down about 13 per cent on Monday, its steepest one-day drop in 30 years. Circuit breakers, which kick in when stocks at Dow drop more than 7 per cent in trading session, were activated for the third time this week, prompting a 15 minute halt in trading.
However, a squeeze on the US shale industry may help prices recover in the long term.
"Oil prices have already fallen. If they persist at the current levels, then the immediate impact will be on shale oil producers, who will [at an aggregate level] reduce the drilling of new wells because this will not be viable at current prices," said Amit Bhandari, a fellow of energy and environment studies at Gateway House in Mumbai.
"As shale wells have a relatively short life compared to conventional wells, reduced drilling will result in lower production over a few months. This should reduce the surplus oil in the market and help restore prices to some extent," he said.