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Oil price in US falls below $0 raises many questions

As the demand for energy collapsing amid the coronavirus pandemic. US oil prices jumped on Wednesday after falling below zero for the first time at the start of the week due to a coronavirus-triggered collapse in demand.It is due to loss of demand has pushed domestic storage tanks toward capacity.

 

West Texas Intermediate, which is the US benchmark, was trading for negative $40 a barrel, down 300% on the day, with oil producers paying buyers to take the crude they can’t store. Oil firms have had to rent tankers to store the surplus supply.

 

US benchmark West Texas Intermediate for June delivery was up almost 10 per cent at $12.68 a barrel, paring gains of around 20 per cent at the open in Asia. The market has been under heavy pressure due to massive oversupply as lockdowns and travel restrictions introduced worldwide to stem the spread of the coronavirus hammer demand. US crude has been particularly hard-hit due to storage problems, as WTI is delivered at a single, inland point.

 

European benchmark Brent crude for June delivery bounced more than 2 per cent at the open, but then reversed gains and was trading around 3 per cent lower, with a barrel changing hands for $18.73.

 

It had tumbled to an 18-year low the previous day. The oil crisis was worsened by a price war between Saudi Arabia and Russia. They drew a line under the dispute earlier this month and, along with other top producers, agreed to slash output by almost 10 million barrels a day to shore up coronavirus-hit markets.

 

Key points:

# Oil has become effectively worthless because there is no storage left for it anymore

# The price of crude oil was nearly $US60 at the start of the year

# Big producers have announced cutbacks in production

# The benchmark price for US crude plummeted to negative $US35.20 a barrel as traders sought to avoid owning crude with nowhere to store it.

# The price had been nearly $US60 at the start of the year, before shutdown orders swept the world and stopped the operation of factories, offices and cars.

# Demand for oil has collapsed so much that facilities for storing crude are nearly full.

 

The fact is there is such an oversupply of oil that there is no room to put it all. So why don’t they just cut back production? Because it’s hard to shut and restart an oil well, and Americans, in the short term, don’t need it. It means is there is no place to put it, so you’ve got to flush it basically.

 

“They don’t want it. So when it’s minus a dollar, they’ll pay you a dollar to get it out of there.”

Big oil producers have announced cutbacks in production in the hope of better balancing supply with demand, but many analysts say that is not enough.

 

Traders are willing to pay someone else to take that oil for delivery in May and shift the burden of figuring out where to keep it. “Basically, bears are out for blood,” analyst Naeem Aslam said in a report.