In an unprecedent turn of events oil prices have fallen to below zero. That’s right – US oil has reached an all-time low of -38.76 USD (at 3:32 pm New York time) meaning that producers are actually paying customers to take their oil. The world is going quite upside down and we are bearing witness to various new phenomena in lots of markets. However, the negative price era is something that was until recently only predicted by very few economists and market experts and even then, it was dismissed by almost everyone else in the room. This however has changed as well.
As the market sees a sharp turn from $18.43/barrel on Friday to below a discount rate of USD 35 a barrel we need to take a deeper dive as to what this actually means and why this is happening, at the end there must be a logic to all this.
WTI or Western Texas Intermediate also known as Texas Light Sweet is a benchmark for US oil prices, it is in fact the commodity underlying the trade of oil on the New York Mercantile Exchange (NYMEX) and it is about WTI that this article speaks unless otherwise stated. It is also important to note here that oil is traded in futures contracts meaning that you can’t actually go buy it off the shelf, but you buy it in future delivery contracts. The contracts discussed in this article are explicitly meant to be the May contracts that have been sold off already a couple of months ago.
In a shocking though in hindsight rather not so surprising event, investors have decided to bail out on their May delivery contracts for oil, and when that happens the traders have one of two options: either to take delivery of the oil contract, or to roll over their position onto future contracts. In other words, traders are now stuck with oil that no one needs so they need to get rid of it as soon as they can or they risk losing money on storage, storage that is actually running very low in the United States. The pricing of contracts below zero signifies just how over-saturated the US oil market is. With demand practically vanishing due to the Covid-19 health crisis that has hit most sectors and the supply trying to remain afloat. What this has created is an extreme case of oversupply of oil that no one needs (at least at the present moment) and there is no more space to store it. In the current scenario the country’s main storage facilities at Cushing, Oklahoma will be particularly full in May and so traders had to give in to the pressure and cave to negative oil prices.
Noteworthy is that this is not technically the first time that oil has seen a negative price, since this has happened before in 2016 when a North Dakota crude oil manufacturer briefly priced oil at -0.50 USD a barrel during the oil price crisis of 2016, then later raised the price to $1.50. It is however the first time that the entire supply of WTI for the month of May be priced negative.
In contrast, the prices for the June contracts of WTI are still trading at levels of $21.6 with consumer sentiment still betting on a rebound to happen in the global demand. Also noteworthy is that Brent Crude which is a seaborne oil is still trading at levels of $26.23 a barrel narrowing down this crash prices to the US economy.
In a very clear signal the oil market is showing the world that the oil cuts decided by the OPEC++ that included cuts from all major producers in the world is simply not enough to sustain as the production levels are still much higher than the demand levels. Also while some oil importers are still filling up their stocks in benefit of the current low oil prices, it is important to mention that depending on the developments of the Covid-19 induced lockdowns, the global storage facilities could be overwhelmed with oil leading to a near halt in oil trading that would force prices down even further. While most people would rush in to fix the situation with the oil markets, the solution is actually a healthcare one. A prompt and radical response is required to the Covid-19 crisis to develop a vaccine and decrease the global spread because simply put till then, we will continue seeing radical changes to markets.
