On Monday, U.S oil (WTI) and Canadian oil (WCS) witnessed its greatest fall in history. It was a tumultuous day in the market as U.S oil futures (WTI) May contracts traded negative to as low as minus $40.32 per barrel while June contract remained relatively stable at $22 per barrel. WCS traded as low as minus $34.75 per barrel representing a 1,262.21% decline in its value. WTI has emerged from the negative territory and is trading at $1.35 as at 2:55am GMT whereas WCS remained in the negative zone at a price of minus $1.00.
The implication of this negative price is that oil traders were paying buyers as much as $40.32 per barrel to take the oil off their hands due to the fear of not having storage capacity in May. Thus, traders were not willing to roll over expiring contracts as they would do in normal situation. Meanwhile, brent crude was not largely affected as it maintained a price of above $25.
The main reason behind the sell offs in May contracts which is due to expire on Tuesday is because oil traders are dishing their contracts rather than rolling it over in order to avoid storage cost in the coming month. Analysts expect the oil glut to continue as demand of oil has dwindled by 30% globally due to lockdown in most countries.
Center for Global Energy Policy at Columbia University director said “an unprecedented collapse to minus $40 per barrel at the US benchmark had a lot to do with the expiry of the May contract. But it also reveals significant underlying structural problems, as storage capacity fills up that will hang over US prices until supply shuts in and OPEC+ cuts begins to bite”
Oil storage has been a bone of contention due to low demand of oil as a of result movement restrictions and the slow down of industrial activities globally due to Covid-19. It is estimated that about 4.5 billion people globally is under some sort of movement restriction.
The world has more crude than it can use despite the 10% production cut agreed by OPEC+ and commercial decisions made by oil Majors in the US to cut output. Oil which was once a treasured commodity, has become a thing that no one wants to take delivery of.
U.S president wants to save American oil companies from collapse which will result in massive job loss that will add to the high rate of unemployment in the US currently being caused by Covid-19. In the bid to save the oil industry he brokered the record deal with OPEC+. He has also said that his government will buy oil for the country’s national reserve.
However, the big problem which every one is facing is the storage. It has been reported that US will run out of storage facility soon. According to ANZ Bank, stockpiles at Cushing, the main delivery point in the US for oil has risen almost 50% since the beginning of March.
Analyst predicted fall in oil prices and the possibility of negative oil price, but no one knew it was going to happen on Monday, as May contracts was about to expire. If the oil glut continues without any improvement in the demand for oil soon, there is possibility that June contract will have the same fate as may contract towards its expiry.
Disclaimer: Any person accessing this information and considering potential investment opportunities featured here should make their own commercial assessment of an investment opportunity after seeking the advice of an appropriately authorized or regulated financial advisor. This information should not be construed as advice or a personal recommendation to any prospective investor