For the first time in history, US crude oil futures crashed to below US$0 on Monday (21 April) amid the excess supply caused by the COVID-19 pandemic. The day closed at an unprecedented negative US$37.63 (S$53.64) per barrel as traders paid to dispose of oil.
The international benchmark, Brent crude also contracted but the slump is not as bad because there is more available storage worldwide.
Although US oil prices entered uncharted negative territory for the first time, whether these negative prices will trickle down to consumers is still uncertain. Normally, petrol prices at the pump will be lower as oil prices fall.
The global supply glut was caused by the severe lack of physical demand for crude oil amid the pandemic as billions of people worldwide stay at home to contain the spread of the COVID-19 virus.
On Monday, with no place the store the crude oil, traders left in a frenzy from the expiring May US oil futures contract. However, the price per barrel is at a much higher level for the June WTI contract at US$20.43 (S$29.12).
The partner at hedge fund Again Capital LLC in New York, John Kilduff said: “Normally this would be stimulative to the economy around the world.”
“It normally would be good for an extra 2 per cent on the GDP. You’re not seeing the savings because no one is spending on the fuels,” he added.
Following the record low of minus US$40.32 (S$57.48) per barrel, the May US oil futures contract dropped 306 per cent or US$55.90 (S$79.69) to reach a discount of US$37.63 (S$53.64) per barrel. Brent declined 9 per cent or US$2.51 (S$3.58) to reach US$25.57 (S$36.45) per barrel.
Oil market analyst at Rystad Energy, Louise Dickson commented: “It’s like trying to explain something that is unprecedented and seemingly unreal.”
“Pricey shut-ins or even bankruptcies could now be cheaper for some operators, instead of paying tens of dollars to get rid of what they produce,” she further remarked.
Hundreds of barrels have flooded storage facilities worldwide because refiners are processing much less crude than usual. Vessels have been hired by traders for filling and anchoring them with the surplus oil. Tankers worldwide are housing a record 160 million barrels.
In the week to 17 April, US crude stockpiles at Cushing increased 9 per cent. According to market analysts based on a Monday (20 April) report by Genscape, these amount to around 61 million barrels.
Between May and June, the spread broadened to US$60.76 (S$86.61), which is the largest in history for the two nearest monthly contracts.
Ahead of expiry on Monday, investors deserted the May contract due to the lack of demand for the actual oil.
As the futures contract expires, traders must choose whether to take delivery of the oil or switch into another futures contract for a later month.
Currently, very few counter-parties will purchase from investors and deliver the oil, which makes the process relatively complicated when normally it is not the case. At Cushing in Oklahoma, storage is rapidly filling as crude is delivered there.
An analyst at Price Futures Group in Chicago, Phil Fylnn reported: “The storage is too full for speculators to buy this contract, and the refiners are running at low levels because we haven’t lifted stay-at-home orders in most states.”
“There’s not a lot of hope that things are going to change in 24 hours,” he pointed out.
The COVID-19 pandemic which crimped demand and the Saudi Arabia-Russia price war which boosted supply, have caused oil prices to be under pressure for weeks. The global supply glut will not decline as quickly even though the two countries agreed more than a week ago to slash supply by 9.7 million barrels per day (bpd).
As opposed to cutting oil supply from May onwards, Saudi Arabia is considering the cuts as soon as possible, according to a Wall Street Journal reporter on Twitter, citing sources.
Since the beginning of the year, US crude futures have dropped about 130 per cent to levels below break-even costs necessary for many shale drillers whereas Brent oil prices have also crashed about 60 per cent. Due to this, spending has been drastically cut and drilling stopped.
Prices are also affected by the weak global economy, as captured by weak global economic data. According to the Bundesband, recession has swept Germany and recovery will not likely be quick because the pandemic-induced restrictions could be imposed for an extended period.
Also, in March, Japanese exports fell the most in nearly four years. Exports to the US, such as cars, dropped the fastest since 2011.
US oilfield services giant, Halliburton Co announced the biggest budget cut among top energy companies on Monday and it reported a US$1 billion (S$1.43 billion) loss on charges in Q1.
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