Oil could hit negative $100 per barrel next month
I can’t believe I’m writing this “the demand for oil is inelastic” — supply didn’t fall and demand didn’t rise. No response to the historic plunge in the price of crude.
As I write this post, the prices of oils in the US are negative as demand dries up!
What does this mean?
The price of US oil is at a negative value for the first time in history mean oil producers are paying buyers to take the commodity of their hands. It’s believed the storage capacity could run out in May.
As coronavirus tear across the globe, the earlier notion that oil supply and demand driven by:
• Changes in the US dollar
• OPEC (Organization of the Petroleum Exporting Countries)
• Production and inventory supplies
• The global economy
• Deals and treaties
-No longer holds. Demand for oil has all dried up as lockdowns across the world continue as people keep indoors.
Oil firms are renting tankers to store the surplus supply, and that has forced the prices of US oil into negative territory.
Most of us expected this and the situation might worsen as the world keeps indoors. The price of a barrel of West Texas Intermediate (WTI), used as the benchmark for US oil, fell as low to -$37.63 a barrel.
Yes, the demand for oil is inelastic. Remember, prices rise during periods of global economic strength, and as demand outpaces supply. The price per barrel falls when the reverse is true. Demand can’t keep up with the growing supplies; even worse, companies are running out of storage.
Meanwhile, COVID-19 has driven the factors that act on supply and demand. It’s estimated that Oil could hit negative $100 per barrel next month. OPEC has been working to cut on production, but some members halted production by worsening the situation.
Coronavirus Pandemic and Global Crude Price War
Late last month Saudi Arabia started a global crude war price, which has contributed to the US oil plunge. The aggressive move by the world’s crude oil top exporter sent shock-waves through the markets. And US prices will suffer more than a future contract for May delivery expired Tuesday, adding toes pressure to WTI.
The threat by Riyadh to discount its crude and raise production affected global prices of Brent crude, an international oil marker plunging to a low $30 a barrel. The US West Texas intermediate, that benchmark fell drastically.
Why would the world’s top exporters to move so aggressively, while the demand reels from the current pandemic? How will this unfold in the coming days for the wider oil industry?
It’s all started with Saudi Arabia distrust with Russia as they both wanted to lead Opec. Opec called for the need to cut oil production to support the prices in the face of a coronavirus outbreak and its effect on the global economy. This unfolded when Russia baulked at the plan, and the Gulf kingdom turned to an ally it had worked with to prop up the oil market 4 years ago.
Following this rubble, Riyadh raised production and started offering it crude at steep discounts. To punish Russia for leaving the so-called Opec+ alliance they created to chaos. The low prices might have benefited Saudi Arabia cements its position as the world’s oil exporter, taking on Russia and other high-cost producers.
As production continues and demands low, almost to zero prices across the world. Prices can go outright to negative in inelastic markets where producers pay the buyers to take it. You already know the natural gas that comes out of the ground as a byproduct of oil production sometime cost less than zero as it’s viewed as waste. Moreover, power generators ask their customers to use electricity because it’s cheaper than shutting down power plants or even hang to restart them later.
It’s funny that dairy farmers are yet to the point of paying people to buy milk, but they’re dumping what they have because the cows are production is more than the market can bear. You can’t shut off a cow, right!
Oil Prices Crashed
In a light view, if you had a stinking barrel of oil in your backyard, it would prompt you to pay someone $35/bbl. To take it away. A relieve that you escaped a charge of $300/bbl.
The situation oil producers are having nowhere to go with the inexorable production that takes weeks and months to reduce to zero. Oil producers need someone to handle the excess supply now, and they’re sold out of capacity to do so.
As the pandemic continues to tear down the world economy, let’s all follow the guideline set to curb the spread of the virus.
