United States oil futures plunges below zero for first time in history in unprecedented wipeout on Monday with traders dumping May contracts as analysts warn that crude storage will fill to the brim by next month, and US shale firms weigh the real possibility of shutting down production.
Oil producers are running out of room to store barrels of crude oil across the U.S. as COVID-19 has obliterated oil demand. The price collapse in oil markets accelerated because it was the last day oil producers could trade barrels set for delivery in May.
A negative prices signal sellers or traders would actually pay buyers to have oil taken off their hands in a bid to avoid incurring of storage cost, as demand crashed globally. The reason: 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.
How did this happen? As billions of people around the globe stay home to slow the spread of the novel coronavirus, physical demand for crude has dried up, creating a global supply glut. Oil producers are running out of room to store barrels of crude oil across the U.S. as COVID-19 has obliterated oil demand. The price collapse in oil markets accelerated because it was the last day oil producers could trade barrels set for delivery in May. They depend on trains and pipelines to move their crude oil to refinery but because people are not flying or driving cars and refineries have cut back their intake of crude oil. A negative oil price means the cost of refining and storing oil is now higher than oil itself. Oil has accumulated as people have stopped buying it due to coronavirus lockdowns around the world.
“There is little to prevent the physical market from the further acute downside path over the near term,” said Michael Tran, managing director of global energy strategy at RBC Capital Markets. “Refiners are rejecting barrels at a historic pace and with U.S. storage levels sprinting to the brim, market forces will inflict further pain until either we hit rock bottom, or COVID-19 clears, whichever comes first, but it looks like the former.” “Wow. Prices needed to fall given the rapid decrease in demand and storage filling quickly. But I did not expect them to fall so fast,” Samantha Gross, an energy and climate fellow at the Brookings Institution, told Al Jazeera. “We have never seen companies paying to have their oil taken away. It can’t stay this way for long – it is the market signalling that storage is filling rapidly and that more production isn’t needed.”
“It’s like trying to explain something that is unprecedented and seemingly unreal,” said Louise Dickson, oil markets analyst at Rystad Energy. “Pricey shut-ins or even bankruptcies could now be cheaper for some operators, instead of paying tens of dollars to get rid of what they produce.”
The price collapse along with coronavirus lockdown is reverberating across the oil industry. Since the start of the year, oil prices have plunged after the aggravating impacts of the coronavirus and a breakdown in the original OPEC+ agreement. Oil prices were already weighed down by oversupply going into 2020, and were further pressured by coronavirus containment measures that have obliterated demand. But crude prices went into free fall last month after Saudi Arabia initiated an oil price war in retaliation for Russia not agreeing to deep output cuts to offset the blow from COVID-19 disruptions.
With US shale oil producers getting hammered by the oil price war, US President Donald Trump appealed directly to Saudi Arabia’s de facto leader, Crown Prince Mohammad bin Salman and Russian President Vladimir Putin to set aside their differences and stabilize oil markets.
Those efforts culminated in an historic agreement on April 12 between Saudi-led OPEC and its allies led by Russia, a group known as OPEC+, to cut output by 9.7 million barrels per day.
Md Irshad Ayub, English Editor at Millat Times and Delhi-based freelance journalist.