Yesterday, you probably read a headline along the lines of, “The Price of Oil Goes Negative!” Technically, the price of oil didn’t go negative. What happened is that certain oil futures contract prices went negative. The price of a barrel of West Texas Intermediate (“WTI”) crude oil dropped from $18.27 to as low as negative $37.63. Yes, it actually went negative. Although such a scenario sounds unimaginable, even with recent pressure on oil prices, there is an explanation.
Demand for oil has gone down significantly. It can be more expensive to store oil than to sell it a month from now. Yesterday, 4/20/20, was the last chance traders had to sell the May 2020 WTI futures contracts and avoid taking delivery of oil that has no place to go due to dwindling storage capacity. Crude oil is a toxic and dangerous chemical. If there isn’t enough storage capacity right now, it can be worth paying a lot of money to avoid taking delivery. Yesterday’s negative price reflected the basic reality that there is far too much supply in the current atmosphere of “locked-down” economies across the globe.
We certainly do not expect oil prices to remain in negative territory. For instance, the futures price of June WTI is currently trading around $11 per barrel and the July WTI is trading at about $20 per barrel. Demand for oil is much lower now than it was a couple of months ago, but it certainly isn’t $0. Brent crude, the main oil benchmark outside the U.S., is currently trading above $25 per barrel because the supply, demand and storage is so different in Europe and Asia. However, we do expect the volatility of the price of oil to remain high for the following reasons:
The world has gone from using around 100 million barrels per day to a global lock down with planes grounded, cars staying off the road, and industries struggling to survive
U.S. gasoline usage is down 18% in the last 4 weeks according to CNBC, and oil demand worldwide is on pace to decline by more than 20 million barrels per day
Russia and Saudi Arabia do not have a sufficient deal in place but continue to work towards an agreement to curtail production and bring it in line with decreased global demand and limited storage availability
Most global economies continue to explore when to remove quarantine restrictions and “re-open” for business, but global cases and deaths of COVID-19 are still peaking in many countries and the risks of re-opening are unknown
While yesterday may have been an extreme, the new reality is that until there is a cut in production from the producers in the energy space (OPEC+ and Russia), the price of oil will continue to be diminished. Please do not hesitate to contact us with any questions.