Oil prices turned negative; a first in history
Oil traders scrambled to pay people to offload their contracts
Oil prices plunged on Monday (20th April 2020) as it went into the negative territory for the first time in history. The West Texas Intermediate (WTI) traded at a record low of -$40.32 and subsequently settled at -$37.63.
Panic selling
The May futures contract set to expire on Tuesday (21st April 2020). Traders are looking to offload their contracts. This is a contract settled physically, so if a trader is long on it and when it stops trading, they will have to take delivery of the physical crude. This adds to the woes of having to find storage to store them. As such, there was a force selling out of desperation from traders. In this extraordinary situation, traders are paying people to sell their contract.
Despite the WTI crashed, the international benchmark, Brent Crude saw a smaller selloff. It settled at $25.57. Because this contract is settled in cash, there is no need for the traders having to deal with the physical crude and not in a state where they have to find barrels of oil with nowhere to store. This allowed traders to roll over their contracts without having to forcefully sell. Therefore, it is close to impossible to see Brent Crude following the WTI falling below $0.00.
Global impact
1. A decline in oil demands globally
As a result of the 2019–2020 coronavirus pandemic (COVID-19), factory output and transportation demand fell. The aviation industry, heavy in oil consumption, saw the first few months of 2020 having flights grounded. Countries are in lockdown mode and people are not able to travel. Despite the already low production output of oil, the demand was even lower than the supply and the oil are filling up storages.
2. Russia — Saudi Arabia oil price war
In March 2020, Saudi Arabia triggered an oil price war in response to Russia falling out on an agreement with the Organisation of the Petroleum Exporting Countries (OPEC) for not reducing the production output. This disagreement lasted for a while and the oil prices continued to fall. Throughout March, the oil prices remained.
However, in April, the OPEC and Russia agreed to temporarily reduce the production output. Despite the reduction, the output is still more than the demands and seemingly not able to resolve the problem of a buildup of oil excess.
Uncertainty ahead
The coronavirus pandemic outlook remains bleak with signs of little to no improvements. Despite the May futures contract settled at negative, the futures contracts from Jun onwards are trading in the positive regions. There is no clear indication that this will remain the status quo in the long term. On the positive side, the WTI has settled at $16.95 at the end of the week. Oil prices will remain volatile in the weeks to come as there is uncertainty in the commodity markets.
This article is written in the opinion of the author.
