It has been a turbulent Monday for U.S oil futures, Western Texas Intermediate Crude oil (WTI) shed over 286.10% of it’s value to trade as low as $-33.90 per barrel. Canadian oil – Western Canadian Select (WCS) was not spared in the fiasco that engulfed the oil market since the opening of trading on Monday. This turbulence in oil prices has been as a result of significant drop in oil demand by over 30% due to the Coronavirus pandemic. Brent crude however was not deeply dragged into the turmoil as it lost only 6.77% of its value and it is trading at $26.18.
At 08.05pm GMT on Monday, May contract for WTI has lost $52.17 and is currently trading at -$33.90 which represents a 284.78% decline in its value while WCS is trading at -$34.75 a 1262.21% drop in value having lost $34.74. This huge decline in May contract prices is as a result of future traders finding new buyers for the expiring May contracts to take way the oil from their hands rather than shifting from an expiring contract to another contract. On the contrary to May contracts, June contracts for WTI traded at $22.62
Oil traders during a normal situation roll over their oil contracts when it expires. However, if there is anything about this particular period around the world – it is the fact that this period is not a normal situation. Many countries are under lockdown, movement restrictions imposed, local and international flights grounded. With low demands from refineries, oil producers are forced to store their oil in fast dwindling storage facilities or sell at discount.
The supply of oil is largely in excess compared to the demand of oil. OPEC+ in the first week of April 2020 arrived at record deal that would remove 9.7 million barrels of oil per day from oil output in a bid to stem the crisis that awaits the oil market brought upon it by the coronavirus pandemic. However, the effect of these cuts will be seen from May 2020 production. Analyst fear that these cuts in production will not arrive early enough to save the oil market from the devastation it finds itself. According to a senior analyst at Price Futures Group in Chicago “the calvary (OPEC plus cuts) won’t arrive in time to save the oil market. This may prove to be one of the worst deliveries in history. Nobody wants or is in need of oil right now”.
Oil producers has been forced to reduce the prices of their oil and sell at discount prices in an effort to attract buyers that is largely scarce as the world economy is being decimated by Covid-19. Worldwide consumption of oil is estimated at 100million barrels per day. With about 30% drop in demand, it is obvious that supply is greater than demand despite the agreed production cut by OPEC+. As the Covid-19 pandemic is yet to be brought under control, it is hard to see a gleam future for oil in the near term.
Written by:
Ifunanya Ikueze
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Very good job and thanks for sharing such a blog.
Best regards,
Demir Dencker