Coronavirus and the Oil Market: As U.S Crude Oil (WTI) Prices Go Negative
One of the global oil benchmarks, the West Texas Intermediate (WTI), which is the United States oil benchmark, took a nosedive today, below $0 a barrel, which later settled at a negative $37.63 to make it the most significant drop on record since 1983.
It is worthwhile to note that the negative price has never occurred before for an oil futures contract. Futures contracts trade by the month.
The skid in the oil price is due to several reasons, including the coronavirus pandemic, which has led to the low demand for oil, now at a standstill.
The Global oil storage is rapidly-exceeding 70% and approaching operating at maximum even after the agreed oil cuts by OPEC+, and lastly, the May contract/future is set to expire at the end of regular trade on Tuesday which will be followed immediately by the June contract.
To Clarify Those Reasons Above:
Due to the coronavirus pandemic, the demand for oil has been on a low.
First, travel restrictions due to the containment efforts limit the use of jet fuel, and supply chains and industrial activity declines – meaning less oil and oil-based products used.
This has led the global economy to an extremely sharp drop in demand for oil.
Even as the OPEC+ agreed on the oil cuts, and are trying to reduce their output, they can’t keep pace with the rapid drop in global demand as the economy of most countries hits the brakes.
They create a massive oversupply of the oil, and concerns are raised about oil storage.
The three major global oil benchmarks are the Brent crude, West Texas Intermediate (WTI) and the Dubai crude.
The WTI, which was a negative $37.63 (a historic plunge), actually sold for positive $60 in the early start of 2020. But on a general note, Brent crude was in between $20s and declined more than 9% on Monday.
Another reason for the settling of the oil price to a negative $37.63 also stems from the fact that the May contract will be expiring at the end of regular trade on Tuesday.
Due to the contract deadline settling in, Traders were desperately looking for buyers for the barrels of oil before the deadline. Still, buyers were hard to find even as the oil was being put out for free, reflecting a lack of storage space.
According to Dow Jones Market Data, the one-day drop for the West Texas Intermediate crude for May contract CLK20 would be the largest on record since March 31, 1983, in the all-time low for a front-month contract at $10.42 per barrel.
“mostly a reflection of traders rolling contracts to June as no one wants to take delivery because storage capacity is getting close to being reached.”
It is worthy to note that, the prices of other types of crude without a deadline coming up that fast, haven’t declined that so sharply.