This Monday, the different international agencies displayed, on their digital portals, the historical and unprecedented collapse that the US oil price West Texas Intermediate (WTI) experienced when registering negative figures, with a fall of 170%.
The WTI or West Texas Intermediate, is a type of crude oil characteristic of Texas and southern Oklahoma and is used as a reference to price other blends in the United States with similar densities and sulfur levels. This type of oil trades in different ways. The most followed by the markets are the prices of future contracts. These contracts have different delivery dates.
WTI (New York) and Brent (London) are markers for the different oil types, so it is most foreseeable to expect a domino effect in all oil price references worldwide in the coming hours or days. Although the Brent ended the London round at 20 dollars a barrel, it happened 6 hours before the market was closed in New York.
Currently, the contract with the closest delivery date is May, whose expiration date is Tuesday, April 21. This contract is known as an active contract and its price is taken as a reference for the current WTI price.
El Financiero, Mexico’s leading daily newspaper specializing in finance, economy, business and politics, highlights that US oil is operating at a negative price for the first time in history, as a result of the increasingly profound economic impact of the Coronavirus crisis. El Financiero explained that Monday became an unprecedented day of trading, when “the price of May contracts lost all value, breaking all the lows of oil prices since 1946.”
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According to RT, US oil futures WTI for delivery in May registered a record drop on Monday, falling to the closing of the NYMEX exchange to -37.63 dollars per barrel, which represents a drop of 305.97% in one day. After this collapse, the crude of this brand has fallen for the first time in history below 0 dollars per barrel.
The negative price of oil means that the oil tankers are full, and oil producers are forced to pay buyers to collect it. This prevents the closure of the deposits.
As governments around the world extend quarantines due to the rapid spread of the coronavirus, it became apparent, through extreme movement, how oversupplied the US oil market is, following the paralysis of industrial and economic activity. This collapse of a third of global demand for WTI crude is proving that the unprecedented production deal signed a week ago by OPEC and allied members in a bid to curb supply has been too short and too late.
According to the forecasts of the International Energy Agency, the excess supply of oil in April will be 29 million barrels per day, and on average in 2020 it will be 9.3 million barrels per day.
Brent Price
On the other hand, the price of Brent crude for June delivery has fallen this April 20 on the London ICE exchange. Its futures are down 7.87%, to stand at $ 25.87 per barrel. The collapse of this brand of oil also occurs due to the global demand crisis caused by the covid-19 pandemic.
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Causes
In the article “The oil turbulence that the coronavirus brings: a perfect storm,” written by Franco Vielma for Misión Verdad on April 6, it was explained that the recession caused by Covid-19 would bring problems worldwide, including in the oil price, due to the fall in consumption and demand for goods and services.
“Given the possibility that the current cycle could be prolonged and a continued drop in the price of crude oil could occur, the oil price could drop to ‘zero’ or even to a below zero price. An economic peculiarity that can only be explained by the peculiarities of the oil industry.”
“Crude oil consumption is slowing much more than estimated by the decline in mobility due to Covid-19. Vehicles are stopped, companies are stopped, large-scale industrial activity is stopped, more and more countries are going into quarantine, and this is being reflected beyond expectations. This supposes a fall in the demand more and more accentuated.”
Vielma explains that “each producer country and each company have infrastructure to store crude oil, either in tank yards or even in tankers stationed at sea. That storage has diverse capacity, but is typically designed for short-term contingencies with limited capacity.”
He also points out that, in countries like the United States, which extract oil from fracking or shales, the costs of closing wells in some cases end up being higher than paying for someone with storage capacity to take the crude.
“The costs of closing a well on a regular basis go beyond simply turning off a tap. The use of personnel and equipment is required for the application of a scheduled closure without spills. But the real cost of shutting down a well lies in that stopping its activity causes a loss of compression and then resuming well *activity is virtually difficult and very expensive.” He indicates that “the fears of the world oil industry today point to the drop in prices being so dramatic that all the links in the chain stop, from the crude oil markets to shipments and storage, and finally to wells. As of today, US shale oil production is in a loss condition and the wells have begun to close.”
Featured image: Humorist image composition from twitter: @Bilal_Arif_
Translated by JRE/EF
