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US crude oil prices plunged below zero. What does it mean for you
Brent crude, the international benchmark, also slumped, but that contract was nowhere near as weak because more storage is available worldwide.
US crude oil futures turned negative on Monday for the first time in history, falling below zero as traders sold heavily because of rapidly filling storage space at a key delivery point in the country.
Brent crude, the international benchmark, also slumped, but that contract was nowhere near as weak because more storage is available worldwide.
The May US West Texas Intermediate (WTI) contract fell $55.9, or 306%, to settle at a discount of $37.63 a barrel after touching an all-time low of -$40.32 a barrel. Brent was down $2.51, or 9%, to settle at $25.57 a barrel.
Why did US oil prices turn negative?
Oil prices have been falling steadily across global markets since the coronavirus pandemic first broke in China’s Wuhan late last year and spread across the world.
The shutdown of major economies and travel routes to curb the spread of the virus since then have lead to a collapse in oil demand. But oil producers have continued to pump crude from their wells, causing a catastrophic imbalance between oversupplied oil and the biggest slump in demand for 25 years.
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Simply put, this steep fall in oil price is because there’s an elevated supply, the lack of sufficient demand which has gone down so much that facilities for storing crude are nearly full.
Chris Midgley, head of analytics at S&P Global Platts, said tanks could hit their limits within three weeks.
What do ‘negative prices’ mean?
Because of that lack of space to store the excess oil, producers are paying buyers to take the barrels of oil off their hands and shift the burden of figuring out where to keep it.
The US Energy Information Administration said last week that storage at Cushing, Oklahoma, the heart of the US pipeline network, was about 72% full as of April 10.
“There’s no available storage anymore so the price of the commodity is effectively worthless. So when it’s minus a dollar, they’ll pay you a dollar to get it out of there,” Bob Yawger, director of futures at Mizuho in New York, said while speaking to Reuters.
The price plunge was partly due to the way oil is traded. A futures contract is for 1000 barrels of crude, delivered into Cushing, where energy companies own storage tanks with roughly 76 million barrels of capacity.
Each contract trades for a month and May contract is due to expire on Tuesday. Investors holding May contracts didn’t want to take delivery of the oil and incur storage costs and in the end, had to pay people to take it off their hands.
The June contract, with delivery a month away, is still trading at above $20 a barrel, but the price crash indicates that most storage space has been gobbled up.
Is the situation as bad in other countries?
In the US, which produces around 10 million barrels of oil every day, this oversupply of oil is severe because oil storage tanks have filled up, leaving oil companies desperate to sell their surplus barrels.
In other regions, oil prices are still above zero in part because they face lower transport costs and easier access to ports. But this is not to say that oil markets elsewhere have remained unscathed. Brent crude, the international benchmark oil price, is still above $20 per barrel but has fallen by two-thirds since January to 18-year lows.
What happens to petrol prices now?
Petrol prices may fall sharply this year due to the sudden collapse of oil prices and the long road to market recovery that probably lies ahead.
However, the price you pay at the petrol pump does not reflect the oil markets conditions because petrol and diesel prices include government taxes and a profit margin for the seller.
This can be seen clearly as downstream oil companies have kept the prices of petrol and diesel unchanged despite the fall in crude prices. The price of a litre of diesel remains at 62.29 and petrol is retailed at ₹69.59 per litre, according to the data on the Indian Oil Corporation website, in Delhi.
The retail prices in Delhi are the cheapest among all metros and most state capitals due to lower taxes.
A litre of petrol costs ₹76.31 in Mumbai and diesel is priced at ₹66.21 per litre. A litre of petrol in Kolkata will cost ₹73.30 and diesel will be ₹65.71. In Chennai, petrol per litre cost comes to around ₹72.28 and ₹65.71 for diesel.
Will oil prices recover?
They will.
Much of the drop was chalked up to technical reasons—the May delivery contract is close to expiring so its trading volume was light, which can exacerbate swings.
So, the negative US oil price referred specifically to the price for crude delivered in May, the month in which oil demand is expected to be lowest and supplies are expected to be highest.
Oil traders will begin trading barrels for delivery in June in earnest from Tuesday and these are expected to get far higher prices.
Also, a recovery in oil market prices will depend on how quickly demand for transport fuels goes up. If there is a speedy end to coronavirus lockdown it would accelerate a market price recovery and there could be more financial pain for oil producers until 2021 if there is a slow emergence from the Covid-19 crisis.
Even if demand were to return to pre-virus levels, it would take a long time to burn off all that stored crude.
“What the energy market is telling you is that demand isn’t coming back any time soon, and there’s a supply glut,” Kevin Flanagan, head of fixed income strategy for Wisdomtree Asset Management in New York, told Reuters.
The price of June crude contracts also dropped sharply on Monday, falling by 18.4% to $20.43 a barrel.
It is a more reliable view of how traders are thinking about consumer demand for energy in the immediate future. Even though it is not below zero, it is falling rapidly.
(With agency inputs)
