Oil prices in the United States market stumbled to their lowest level in more than 21 years on Monday, with crude storage facilities filling rapidly as the coronavirus pandemic continues to crush demand.
The U.S West Texas Intermediate (WTI) futures fell to $11.23 a barrel on Monday afternoon, down more than 31percent. That’s its lowest level since March 4, 1999.
It comes amid heightened concern that the volume of oil held in U.S storage is rising sharply, with the coronavirus crisis compounding the problem by dramatically reducing consumption.
Oil prices were under pressure as the measures to curb the spread of the virus saw fuel demand evaporates, leaving so much extra supply that countries were finding it hard to find space to store it.
“The current prices show that the Organisation Petroleum Exporting Countries (OPEC) and allies cuts proved to be a blip, with oil prices at the mercy of the virus once again,” Vandana Hari, founder of Vanda Insights, a firm specializing in oil market analysis said.
Faced with a glut of oil that’s clogging up storage facilities, OPEC members agreed to slash global production by 10percent earlier this month, the largest cut to output ever agreed.
Hari noted that until we approach a lifting of the lockdowns in the U.S, oil may drift lower or remain rangebound around current levels.
Brent crude does not have the same storage problems and its June contract was down only 25 cents at $26.29 a barrel on Monday afternoon.
“The current forward crude oil curves for Brent and WTI are now in very deep contango, but the contango is also very front-loaded,” Bjarne Schieldrop, chief commodities analyst at SEB, told CNBC via email.
A contango market implies oil traders believe crude prices will rally in the future, encouraging them to store oil now and to sell at a later date.
Also, 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.
Back in 1999, prices dipped below $16 per barrel, primarily due to Iraq ramping up production at the same time as the Asian Financial Crisis when demand remained low. Despite that, prices did recover rapidly soon afterwards, increasing to $35 per barrel by September of 2000.
The global oil price crash is setting up a bleak second quarter for many nations including countries like Nigeria whose economies are heavily dependent on oil receipts. Nigeria is particularly vulnerable.
Its fiscal and monetary buffers are non-existent today and it does not have the capacity to join in the dog fight for market share following years of neglect and huge capital flight away from its oil industry.
Earlier this month, analysts at Goldman Sachs warned that the coronavirus shock was “extremely negative for oil prices and is sending landlocked crude prices into negative territory.”
The U.S. investment bank said it expected waterborne crudes like Brent to be far more insulated from the coronavirus shock, with prices likely to remain near cash costs of $20 a barrel — albeit with temporary spikes below.
DIPO OLADEHINDE
