Oil prices moved into negative territory on Monday, with West Texas Intermediate (WTI) closing at less than -US$37 per barrel — a day-over-day change of -306%. While negative prices aren’t expected to last, oil’s outlook remains challenging.

In a commodity note on Tuesday, Scotiabank Economics said the price drop largely reflected the idiosyncrasies of pricing contracts, but also spoke to the “grim” conditions in global oil markets because of the pandemic.

“Covid-19 and efforts to contain its spread have crippled petroleum demand,” the Scotiabank note said.

The International Energy Agency forecasts that global crude consumption will drop by 30% in the second quarter versus year-earlier levels.

The deteriorating demand combined with heightened fears about storage capacity as WTI futures contracts for May delivery were set to expire on Tuesday. Scotiabank described the situation as a “unique coincidence of timing” that put additional pressure on sellers holding May contracts on Monday, driving prices further south.

Monday’s drop is expected to reverse: June forward contracts are trading at a level that’s more likely near term, the Scotiabank report said.

Still, “While the Monday drop was a product of market idiosyncrasies, it reflects the severity of the current crisis and would not have taken place otherwise,” Scotiabank said.

In commentary on Monday, TD Economics said the price drop served as a reminder of near-term imbalances and storage capacity in oil markets.

“[D]emand destruction in the near term is likely to far outweigh the agreed-upon supply reductions from OPEC+ and market-driven reductions from North American producers,” the TD commentary said.

An imbalance of at least 10 million barrels per day is expected over Q2, TD said, despite agreed production cuts — an estimate based on a return to normal demand starting in late May, which is uncertain.

While U.S. storage capacity isn’t yet exhausted, the downward trend in demand could push inventories close to their maximum in the summer, TD said.

“We are far from the other side when it comes to the demand picture,” TD warned. “[A] repeat of this episode is possible if no signs of demand normalization emerge.”

As it stands, TD forecasted WTI to average US$20 per barrel overall in Q2.

Western Canadian producers may be particularly hard hit, with the main destination of oil from Alberta and Saskatchewan being U.S. Gulf Coast refineries.

“We as Canadians send virtually all of our barrels to the U.S., with no other dance partner,” said Michael Tran, RBC Capital Markets’ energy strategist, in audio commentary on Monday. Until Canada has expanded pipelines in place, “we’re hitched along for the ride with the U.S.,” he said.

Tracking data show just how low oil demand is. U.S. vehicle congestion is down 83% from normal, while flight activity is down 71% across major U.S. hubs, Tran said.

However, an increase in demand in China provides a positive glimpse for the future. Tracking data from China’s top five ports show activity has bounced back to pre-Covid-19 levels, he said.

China’s weekday traffic in some urban centres is also starting to reach pre-virus levels, as workers return to offices, Tran said, though low weekend traffic levels persist.

With North American demand so low, Canadian producers will be forced to reduce production to a large degree if the oil market is to balance in the near term, he said.

For full details, read the reports from Scotiabank Economics and TD Economics, and listen to the audio commentary from RBC Economics.