Oil prices plunged to historic low

Oil fell below zero$ per barrel as demand plummeted   

The oil prices have crashed on Monday. First time in the history –oil prices in US plummeted into negative territory. It fell beyond zero $ per barrel. May futures prices for West Texas Intermediate (WTI) settled at -$37.63 on NYMEX before recovering somewhat. Oil prices plunged more than 300% on Monday.  We never saw this before.

It never happened before. Sellers were actually paying buyers to take the stuff off their hands. With the pandemic bringing the economy to a standstill, there is so much unused oil sloshing around that American energy companies have run out of room to store it. And if there’s no place to put the oil, no one wants a crude contract that is about to come due.

The outbreak of coronavirus pandemic that forced the governments to impose lockdowns to save lives collapsed the demand of oil. The shutdown of industries-transport and most of the businesses have lower the demand for oil as consumption fallen. There is more oil available than it needs in the world.

The prices still remain deep in negative terrain, meaning that holders of oil delivery contracts need to pay to get rid of them. It's a remarkable sign of upended oil markets that are creating deep financial jeopardy for the industry. Oil industry is facing serious financial situation.

Oil analyst Ellen Wald said that “Everyone who wants oil for the month of May has already bought it. There has been very little volume today. As a result, the price for May contracts just kept falling until it went negative”.

The unprecedented negative pricing for May futures is also related to timing, because the June contract is trading at far higher levels in the roughly $21 range. The extreme oversupply situation now in April and expected into May is creating huge dislocations for the May 2020 WTI NYMEX contract today in low traded volumes, because the contract has its last trading day tomorrow 21 April on NYMEX.

The extreme move showed just how oversupplied the U.S. oil market has become with industrial and economic activity grinding to a halt as governments around the globe extend shutdowns due to the swift spread of the coronavirus. An unprecedented output deal by OPEC and allied members a week ago to curb supply is proving too little too late in the face a one-third collapse in global demand.

There are signs of weakness everywhere. Even before Monday’s plunge, buyers in Texas were offering as little as US$2 a barrel last week for some oil streams. In Asia, bankers are increasingly reluctant to give commodity traders the credit to survive as lenders grow ever more fearful about the risk of a catastrophic default.

The price collapse is reverberating across the oil industry. Crude explorers shut down 13 per cent of the American drilling fleet last week. While production cuts in the country are gaining pace, it isn’t happening quickly enough to avoid storage filling to maximum levels, said Paul Horsnell, head of commodities at Standard Chartered.

US crude oil futures turned negative on Monday for the first time in history as storage space was filling up, discouraging buyers as weak economic data from Germany and Japan cast doubt on when fuel consumption will recover.

Physical demand for crude has dried up, creating a global supply glut as billions of people stay home to slow the spread of the COVID-19 pandemic.

                                                                      A K Shah