The collapse of global demand and the lack of storage capacity brought the price of a barrel in the US to historic levels.
This Monday, the US West Texas Intermediate (WTI) barrel plummeted for the first time in its history at negative prices, at a time when reserves are approaching saturation due to the drop in demand caused by the coronavirus crisis..
WTI oil extended its fall and traded to negative values, reaching a floor of -38 dollars, fearing that the world is quickly running out of space to store crude oil after the cutbacks in production agreed by OPEC were insufficient to counter the drop in demand caused by blockages and travel restrictions around the world.
“The world is using less and less oil, and producers see how this is reflected in prices,” says analyst Bjornar Tonhaugen of Rystad Energy.
Furthermore, the crisis worsened after OPEC member Saudi Arabia launched a price war with Russia, which is not a member of this organization.
The two countries brought the dispute to an end earlier this month by agreeing, along with other states, to cut production by almost 10 million barrels a day to boost markets affected by the virus.
But prices kept falling. Analysts estimate that the cuts are not enough to offset the massive drop in demand.
The collapse of the May contract reflects concerns about an exorbitant level of supply entering the markets, as shipments from members of the Organization of Petroleum Exporting Countries (OPEC) such as Saudi Arabia hired in March are on track to cause an overabundance.
“The real problem is that the cavalry (the cuts from OPEC and its allies) will not arrive in time to save their oil market. This could be one of the worst deliveries in history. No one wants or needs oil right now,” he said. Phil Flynn of Price Futures Group in Chicago.
The United States Energy Information Administration reported that oil reserves rose 19.25 million barrels last week.
Sukrit Vijayakar, an analyst at Trifecta Consultants, underlines that American refineries fail to transform crude oil quickly enough, another explanation for why there are fewer buyers and reserves increasing.
Uncertainty about the gap with Brent
Prices due soon for West Texas Intermediate, the US benchmark, are trading at negative values against contracts with a later date (June at $ 20, November at 32) for fear that the Cushing storage center , Oklahoma, is filled to its maximum capacity.
This has caused a breakdown in the prices of Brent futures, the benchmark in Europe, in London. This Monday, this crude oil fell 6.5% to $ 26.10 a barrel.
In this context, US producers have had to start paying customers to take the oil.
“Current prices show that (the impact of) the OPEC + cuts were temporary, with oil prices at the mercy of the virus once again,” said Vandana Hari, founder of Vanda Insights in Singapore. “As long as we do not approach a lifting of restrictions in the US, oil could fall or remain within current levels.”
The collapse in prices is having an impact on the entire oil industry. Crude explorers shut down 13% of the US drilling fleet last week as the increasing global saturation of crude caused a drastic drop in costs and project cancellations among drillers.
“The cut in production we have seen, or are supposed to see coming, is not enough to cover the 25 million to 30 million barrels of daily demand that Covid-19 is destroying,” said David Lennox, a resource analyst at Fat Prophets in Sydney. “We have to see a peak of Covid-19 globally to have a clearer idea of how much demand will be destroyed.”
The International Energy Agency (IEA), the Organization of the Petroleum Exporting Countries (OPEC) and the United States Energy Information Administration updated their oil market forecasts last week and their reading is grim..
Recently, in February, the three agencies projected an increase in global oil appetite of close to one million barrels per day this year. They now project a drop in average annual demand that ranges from 5 million barrels to more than 9 million a day due to airplane freeze, car parking and the suspension of large parts of economies in much of the world.
The IEA is the most bearish of the three agencies, by some margin. On an annual average basis, the Paris-based IEA now expects global oil demand to be 9.3 million barrels per day lower this year than last year. That is equivalent to losing all consumption in India and all of Africa. OPEC is a little less pessimistic, with an annual drop in demand of 6.85 million barrels per day, while the Energy Information Administration seems very optimistic, with a fall of 5.25 million barrels.
Now, if you consider the annual average figures to be bad, the quarterly ones are truly appalling.
The IEA projects a loss in oil demand in the current quarter that equals total US consumption. and Canada, or approximately 23 million barrels per day.
Even without being so pessimistic, the Energy Information Administration and OPEC for their part see a greater fall than all the oil used in France, Germany, Italy, Spain, the United Kingdom and Japan.
All three agencies hope that things will improve, or at least not be so bad, in the second half of the year, with the US Energy Information Administration notably the most optimistic. That optimism would reflect the perspectives of the Trump administration, which seems determined to ease the closure to its citizens as soon as possible.
Those optimistic data are reflected in the price of futures for the barrel of November, whose price is almost triple that of the current one, according to an analysis published this Monday in the Wall Street Journal. The bet is that the coronavirus pandemic will take its course and later this year the demand for oil, and therefore its price, will skyrocket.
When crude oil falls so much and so fast, it generally heralds a rebound in emerging market currencies.
The MSCI Emerging Market Currency Index, which bounced back from the worst quarterly selloff in 11 years, rose to a record high against the West Texas Intermediate contract. In the past, whenever the ratio has seen a similar increase, currencies posted gains in the following 12 months.
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