With an overabundant supply, crude has never dropped below $ 10 since these futures contracts were created in 1983
The collapse of oil reached historic levels on Monday: investors and speculators pay to find buyers at a time when storage capacities reach their limit in the United States.
Thus, in a saturated market, holders of contracts for May – which expire on Tuesday at closing – should find buyers for physical oil as soon as possible. But because the reserves are almost at the limit in the United States, they must erode the prices to place them.
The barrel of WTI crude that was trading at $ 60 per unit earlier this year sank completely on Monday. And more: the day ended at -37.63 dollars.
This means that many pay to dispose of this crude in 159-liter barrels, very expensive to store.
Oil has never dropped below $ 10 since these futures contracts were created in 1983.
The situation could improve in the coming days, according to some analysts.
“It’s a bit misleading to focus on the May contract,” explained Matt Smith, an expert at ClipperData. “There is much more movement on the barrels for delivery in June,” he said of the contract, which, still in decline, keeps prices above $ 20.
The North American barrel of Brent, a European benchmark and listed in London, was less affected, with losses of 6% at $ 26 before closing.
Mobility restrictions to fight the coronavirus in much of the world and economic paralysis sank fuel consumption. And investors expect the situation to worsen.
In addition, the supply of crude is abundant after a price war between OPEC leader Saudi Arabia and Russia, which did not reach a production reduction agreement in early March.
The dispute ended in early April by agreeing to a reduction of 10 million barrels a day to try to sustain prices in markets affected by the coronavirus.
But prices continued their decline to the underworld when it became clear that this cut – which also implies a progressive increase in production – would not be enough to offset the drop in demand.
In this “extremely unbalanced” market context between surplus supply and falling demand, investors “rush to ditch” their oil purchases, said Craig Erlam of Oanda.
Weak demand
The United States “has the biggest storage problems,” said Jasper Lawler of the London Capital Group.
“Demand is so much lower than supply that reserves could have reached 70% to 80% of capacity,” he estimated.
Sukrit Vijayakar, an analyst at Trifecta Consultants, notes that US refineries fail to transform crude quickly enough, which explains why fewer buyers and reserves are filling up.
“The world is using less and less oil, and producers see how this is reflected in prices”, says analyst Bjornar Tonhaugen of Rystad Energy.
“Although OPEC has accepted an unprecedented reduction in production, the market is flooded with oil,” ANZ bank said in a note.
WTI “unhooked” from Brent
Michael McCarthy, an expert at CMC Markets, affirms that the fall of the WTI “evidences an excess” of the crude reserves at the Cushing terminal (Oklahoma, southern United States).
The US benchmark is now “disengaged” from Brent, Europe’s benchmark for oil, and “the gap between the two has reached its highest level in a decade,” he stressed.
The United States Energy Information Agency (IEA) assured that oil reserves rose 19.25 million barrels last week in the world’s leading producer and consumer of black gold.
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