NY and London – The value of a barrel of New York WTI oil price for May delivery dropped below zero on Monday at the end of a hellish session, with investors desperately looking to get rid of some barrels in a saturated market.
A phenomenon that has come to combine with the sharp drop in demand due to the economic paralysis caused by the pandemic.
It’s “unprecedented” and “completely unreal,” says Louise Dickson, an oil market specialist for Energy.
WTI’s contract for delivery in May expiring Tuesday at the close, those who hold it must indeed find physical buyers as soon as possible.
But as stocks have already risen enormously in the United States in recent weeks, they have been forced not only to sell their prices to convince them to grab their barrels, but to pay them to do so.
“And they paid dearly,” said M me Dickson.
The 159-liter barrel of crude oil listed in New York, which was still trading at $60 at the start of the year and at $18.27 on Friday evening, finally ended at -37.63 dollars after an epic plunge, never seen on the oil market.
The barrel of WTI had never fallen below 10 dollars since the creation of this contract in 1983.
The situation should however improve in the coming days, say several analysts.
“It is a bit misleading to focus on the May contract,” said Matt Smith, an oil market expert for Clipper Data. “There are a lot more exchanges on the barrel for delivery in June”.
And the latter resisted a little better: it fell by “only” 18% Monday to finish at 20.43 dollars, which reflects the market’s hope that the descent into hell will be halted in the weeks to come.
The barrel of Brent from the North Sea, the European benchmark listed in London, was also much less affected since it yielded only 9%, to finish at 25.57 dollars.
The fact remains that the oil market has collapsed for several weeks while travel restrictions in many countries and the paralysis of many economies due to the coronavirus crisis have melted demand. And investors expect even worse, as a deep recession is looming around the world.
On the supply side, the market was inundated with low-cost oil after prominent member of the Organization of the Petroleum Exporting Countries (OPEC), Saudi Arabia, launched a price war with Russia to gain maximum shares. Steps.
The two countries put an end to their dispute at the beginning of the month by agreeing, with other countries, to reduce their production of nearly 10 million barrels per day to stimulate the markets touched by the virus. Donald Trump – who played a role in the negotiations – even mentioned a drop of 20 million barrels a day.
But prices continued to plummet when it became clear that the promised reductions would not be enough to offset the collapse in demand.
In this context of an “extremely unbalanced” market, between falling demand and an overabundant supply, “people are rushing to offload” their oil purchases, noted Craig Erlam of Oanda.
“The United States, as a landlocked market, has the biggest storage problems,” said Jasper Lawler, analyst for London Capital Group.
“The demand is so much below the supply that the reserves could already have reached 70% to 80% of their capacities,” he added.
Crude inventories in the United States have increased steadily since mid-January in the United States, and have grown 75 million barrels in total to more than 500 million barrels, according to the US Energy Information Agency., adding to the woes of a market that was already overflowing with black gold before the COVID-19 pandemic.
“The brokers have swallowed cheap barrels and filled the storage spaces,” says Louise Dickson. In Cushing, Oklahoma in particular, where the barrels serving as a reference for the WTI are stored, reserves have jumped 48% since the end of February to reach 55 million barrels and “there is only room left for around 21 million barrels,” she said.
However, with the fall in prices, American producers pumped less, but their extractions still amounted in early April to more than 12 million barrels per day in the country.
On Monday evening, Donald Trump announced that he intended to add 75 million barrels to the U.S. emergency reserve to fill it.
He then specified that he would either buy this quantity of oil if Congress gave him the green light or open to third parties, the storage capacity which is sorely lacking elsewhere, in exchange for remuneration.
As of April 17, it contained 635 million barrels and the authorized limit is currently 713.5 million barrels.