29 Apr 2020
The global economy, which is reeling under the coronavirus instigated lockdown across the world, received a significant jolt on 20th April when oil prices collapsed to a negative value. The cost of West Texas crude fell to -37.63 per barrel, and sellers were pushing to sell their existing May futures contracts before the deadline.
Bloodbath in the oil markets
This unprecedented situation of the oil price collapse is due to a gut in supply combined with the slump in the global economy created by the COVID 19 outbreak. All this set the stage for the most significant drop in oil demand in the past 25 years. The oil price collapse accelerated the real fear that the world economy might witness the most significant downturn since the great depression.
Analysts gave early warnings that the demand for oil would be at its lowest since 1995 due to the COVID 19 outbreak. However, oil producers continued pushing crude oil into the market at record levels without paying heed. A few months back, the US government brokered a deal between OPEC and the oil-producing countries to reduce oil production. But even that couldn’t prevent the price from crashing.
The oversupply has pushed oil refiners to look for ways to store the oil at sea using tankers. This sudden demand pushed tanker rates higher. At the same time, refiners are reducing their production due to the lack of storage space for their output, and many refineries are looking at shutting down operations. If that happens, it will further hurt crude oil demand.
Experts think that about half of the oil-producing companies will be facing a cash crunch, and they may have to look for ways to increase their liquidity. The US shale complex, for instance, has been an expensive proposition from the start, and there will likely be supply losses even in May. Production cuts are imminent. Traders believe that the oil price may turn negative again in June if the current situation prevails.
When the lockdown ends, much will depend on how quickly economies can revive and how producers, including those in the US shale patch, continue to respond. That would allow inventories to stop rising and begin to plateau. However, if the lockdowns extend beyond June, things will get more complicated. As the global economy back to life, oil refineries will not be roaring back towards full capacity immediately.
Ambrose, J. (2020). Oil prices dip below zero as producers forced to pay to dispose of excess. Https://www.theguardian.com/world/2020/apr/20/oil-prices-sink-to-20-year-low-as-un-sounds-alarm-on-to-covid-19-relief-fund, 1.
Cunningham, N. (2020). The Oil Market Crash Is Far From Over. Https://oilprice.com/Energy/Oil-Prices/The-Oil-Market-Crash-Is-Far-From-Over.html, 1.