by Hans Izaak Kriek*
The price of US oil has turned negative for the first time in history. That means oil producers are paying buyers to take the commodity off their hands over fears that storage capacity could run out in May.
Demand for oil has all but dried up as lockdowns across the world have kept people inside. Asa result, oil firms have resorted to renting tankers to store the surplus supply and that has forced the price of US oil into negative territory.
US crude oil futures collapsed below $ .0 on Monday for the first time in history, amid a coronavirus-induced supply glut, ending the day at a stunning minus $37.63 a barrel of West Texas Intermediate (WTI) as desperate traders paid to get rid of oil.
Brent crude, the international benchmark, also slumped, but that contract was nowhere near as weak because more storage is available worldwide.
While US oil prices are trading in negative territory for the first time ever, it is unclear whether that will trickle down to consumers, who typically see lower oil prices translate into cheaper gasoline at the pump.
European oil market is very nervous after US oil price fell below zero
In London, the price for a barrel of Brent North Sea oil had also fallen, but by just 7 percent to just over $ 23 a barrel. The Brent is an important benchmark for oil in Europe, Africa and the Middle East. But there is also a large oversupply of oil in Europe and the rest of the world, because the oil market is struggling with a perfect storm. The corona crisis and the severe recession of the world economy have caused the demand for oil to fall sharply.
One day after the historic drop in the US oil price, the price of Brent oil has fallen to its lowest level since 2001. Brent oil, the European and even global reference, dropped briefly to $ 18 a barrel on Tuesday and is trading in the early afternoon. at $ 21. That is 18 percent lower than Monday’s closing price. The oil market is very nervous after the US oil price (WTI) fell below zero for the first time in history on Monday evening.
The oil price is under pressure especially in the US, because there is a scarcity of storage capacity for the ’continental’ oil. The ’maritime’ Brent oil from the North Sea is easier to park temporarily in oil tankers.
But there is also a large oversupply of oil in Europe and the rest of the world, because the oil market is struggling with a perfect storm. The corona crisis and the severe recession of the world economy have caused the demand for oil to fall sharply.
At the same time, oil production remains high. Saudi Arabia, Russia and their allies have agreed to cut production by 10 million barrels a day, but that cut will only come into effect in early May. Moreover, the decrease in production is smaller than the decrease in demand. There are reports that the oil countries would reduce their production earlier than planned.
As billions of people around the globe stay home to slow the spread of the novel coronavirus, physical demand for crude has dried up, creating a global supply glut.
Traders fled from the expiring May U.S. oil futures contract in a frenzy on Monday with no place to put the crude, but the June WTI contract settled at a much higher level of $20.43 a barrel.
“Normally this would be stimulative to the economy around the world,” said John Kilduff, partner at hedge fund Again Capital LLC in New York. “It normally would be good for an extra 2% on the GDP. You’re not seeing the savings because no one is spending on the fuels.”
The May US WTI contract fell $55.90, or 306%, to settle at a discount of $37.63 a barrel after touching an all-time low of -$40.32 a barrel. Brent was down $2.51, or 9%, to settle at $25.57 a barrel.
“It’s like trying to explain something that is unprecedented and seemingly unreal,” said Louise Dickson, oil markets analyst at Rystad Energy. “Pricey shut-ins or even bankruptcies could now be cheaper for some operators, instead of paying tens of dollars to get rid of what they produce.”
Refiners are processing much less crude than normal, so hundreds of millions of barrels have gushed into storage facilities worldwide. Traders have hired vessels just to anchor them and fill them with the excess oil. A record 160 million barrels is sitting in tankers around the world.
US crude stockpiles at Cushing rose 9% in the week to April 17, totaling around 61 million barrels, market analysts said, citing a Monday report from Genscape.
The spread between May and June at one point widened to $60.76, the widest in history for the two nearest monthly contracts.
Investors bailed out of the May contract ahead of expiry later on Monday because of lack of demand for the actual oil. When a futures contract expires, traders must decide whether to take delivery of the oil or roll their positions into another futures contract for a later month.
Usually this process is relatively uncomplicated, but this time there are very few counterparties that will buy from investors and take delivery of the oil. Storage is filling quickly at Cushing in Oklahoma, which is where the crude is delivered.
“The storage is too full for speculators to buy this contract, and the refiners are running at low levels because we haven’t lifted stay-at-home orders in most states,” said Phil Flynn, an analyst at Price Futures Group in Chicago. “There’s not a lot of hope that things are going to change in 24 hours.”
Prices have been pressured for weeks with the coronavirus outbreak hammering demand while Saudi Arabia and Russia fought a price war and pumped more. The two sides agreed more than a week ago to cut supply by 9.7 million barrels per day (bpd), but that will not quickly reduce the global glut.
Saudi Arabia is considering applying oil cuts as soon as possible, rather than starting from May, said citing sources.
Brent oil prices have collapsed around 60% since the start of the year, while U.S. crude futures have fallen around 130% to levels well below break-even costs necessary for many shale drillers. This has led to drilling halts and drastic spending cuts.
The leading exporters, OPEC and allies such as Russia - have already agreed to cut production by a record amount.
In the United States and elsewhere, oil-producing businesses have made commercial decisions to cut output. But still the world has more crude oil than it can use.
And it’s not just about whether we can use it. It’s also about whether we can store it until the lockdowns are eased enough to generate some additional demand for oil products.
Capacity is filling fast on land and at sea. As that process continues it’s likely to bear down further on prices. It will take a recovery in demand to really turn the market round and that will depend on how the health crisis unfolds.
There will be further supply cuts as private sector producers respond to the low prices, but it’s hard to see that being on a sufficient scale to have a fundamental impact on the market.
Weak global economic data also pressured prices. The German economy is in severe recession and recovery is unlikely to be quick as coronavirus-related restrictions could stay in place for an extended period, the Bundesbank said.
Japanese exports declined the most in nearly four years in March as US-bound shipments, including cars, fell at their fastest rate since 2011.
US oilfield services giant Halliburton Co on Monday reported a $1 billion first-quarter loss on charges and outlined the largest budget cut yet among top energy companies.
President Donald Trump has said the government will buy oil for the country’s national reserve. But concern continues to mount that storage facilities in the US will run out of capacity, with stockpiles at Cushing, the main delivery point in the US for oil, rising almost 50% since the start of March, according to ANZ Bank.
For US drivers, the decline in oil prices, which have fallen by about two-thirds since the start of the year - has had an impact at the pumps, albeit not as dramatic as Monday’s decline might suggest.
*International political commentator for European Business Review and editor-in-chief at Kriek Media International
By: N. Peter Kramer
