The coronavirus pandemic has severely reduced oil demand around the world due to large declines in airline, car, shipping, and trucking traffic as well as manufacturing. When oil prices are negative, it means traders holding oil futures are paying buyers to take it off their hands or risk having to take physical delivery of the oil, which most are incapable of doing.
Demand for crude oil is projected to fall by 29 million barrels per day this month, according to the International Energy Administration. Coronavirus has forced countries around the world to issue “stay-at-home” orders to slow the spread of the disease. Lower economic activity means weaker demand for crude oil and its byproducts, including gasoline and jet fuel.
Inventories have ballooned by 48 percent to about 55 million barrels, according to a recent report from the Energy Information Administration.
Oil supplies were swelling even before Saudi Arabia launched a price war against Russia on March 8 after the latter refused to join OPEC in slashing production, causing oil prices to post their largest single-day drop on record.
After more than a month of pumping out oil at elevated production levels, the world’s largest producers agreed on April 12 to historic cuts that will reduce output by 20 million barrels per day beginning May 1.
The deal, however, won’t be able to offset the big drop in demand.
“To prevent inventories reaching capacity limits, lower prices are needed to trigger further production shut-ins in North and South America,” wrote the chief investment officer of the global wealth management arm of Zurich-based investment bank UBS.
Just last week the International Energy Agency reported a record 19 million barrels increase in domestic crude oil supplies.
Not even OPEC has been able to provide any relief for the ailing industry. While the cartel and its global partners were able to agree upon a 9.7 million barrel per day cut, the market clearly thinks it’s not enough.
West Texas Intermediate (WTI) has lost 82 percent of its value this year. WTI crude oil futures for May delivery cratered by 305 percent to -$36.73 a barrel. At a price below zero, buyers would be paid to take delivery as there are costs associated with transportation and storage.
Vandana Hari, founder of Vanda Insights, a firm specialising in oil market analysis, noted, “The current prices show that the OPEC+ cuts proved to be a blip, with oil prices at the mercy of the virus once again,” adding that “until we approach a lifting of the lockdowns in the US, oil may drift lower or remain range bound around current levels.”
The oil price collapse is sending shockwaves throughout the entire industry, with oil majors slashing spending across the board, and explorers cutting as much as 13 percent of their drilling fleet as the crisis rages on.
US oil prices plummeted in historic fashion Monday, crashing below zero as traders unloaded positions ahead of the expiration of May contracts Tuesday.
West Texas Intermediate crude oil futures for May delivery cratered by 305 percent to -$36.73 a barrel. At a price below zero, buyers would be paid to take delivery as there are costs associated with transportation and storage. The selling had WTI on track to close at its lowest level since recordkeeping began in March 1983, according to Dow Jones Market Data.
The June contract was trading lower by 18 percent at $20.43 a barrel.
The May contract is a “horror show” and “heading into the worst delivery situation in history,” Phil Flynn, senior market analyst at Price Group Futures, told FOX Business. “With demand still dead and OPEC+ cuts not hitting fast enough, the market looks like it has no bottom
