U.S. oil prices on Monday crashed and turned negative for the first time in history, as the lockdown across the globe continues amid the coronavirus pandemic and traders don’t want to get stuck owning crude with nowhere to store it.
West Texas Intermediate (WTI) crude for May delivery shed more than 300 per cent to settle at -37.63 USD per barrel on the New York Mercantile Exchange.
This simply means that the oil producers are paying the buyers to take the commodity off their stocks amid fears that storage capacity could run out in May, the BBC reported.
Demand for oil has collapsed so much due to the coronavirus pandemic that facilities for storing crude are nearly full.
As a result, oil firms have resorted to renting tankers to store surplus supply, forcing the price of oil in the US to the negative zone, the same BBC report stated.
Chris Midgley, head of analytics at S&P Global Platts believe that the tanks could hit their limits within three weeks.
Benchmark U.S. crude oil for June delivery, which shows a more normal price, fell 14.8% to 21.32 per barrel, as factories and automobiles around the world remain idled. Big oil producers have announced cutbacks in production in hopes of better balancing supplies with demand, but many analysts say it’s not enough.
Basically, bears are out for blood, analyst Naeem Aslam of Avatrade said in a report. The steep fall in the price is because of the lack of sufficient demand and lack of storage place given the fact that the production cut has failed to address the supply glut.
Brent crude, the international standard, was down 2.51 to 25.57 per barrel and WTI Crude was -17.70 per barrel, down by -35.97 at the time of reporting.
The decline comes despite the recent output cut agreement between the Organization of Petroleum Exporting Countries (OPEC) and its allies. There were hopes that agreement would stabilise oil prices, but with the COVID-19 pandemic continuing, there has been a large slip-in demand that is not letting a pick-up in oil prices.
The current market is oversupplied on shrinking demand, creating a situation of free fall for crude.
The severe drop on Monday was driven in part by a technicality of the global oil market. As per the BBC report, oil is traded on its future price and May futures contracts are due to expire on Tuesday. Traders were keen to offload those holdings to avoid having to take delivery of the oil and incur storage costs, it said.
The price of oil has now reached a point that it is increasingly becoming difficult for higher-cost producers to remain in operation and rather look at declaring bankruptcy. A lot of US shale producers are in deep trouble and analysts expect that low oil price for few more months will result in a spate of bankruptcies in the US.