For the first time, oil prices have fallen below zero. Of all the extreme, unparalleled swings in the financial markets since the coronavirus pandemic broke out, none in the crucial segment of U.S. oil trading has been more jaw-dropping than Monday’s crash.
The price of the West Texas crude futures contract due to expire on Tuesday dropped to a negative territory. It’s minus $37.63 a barrel. That’s right, sellers actually paid buyers to get their hands off the stuff.
The reason: with the pandemic stopping the economy, there is so much surplus oil. In fact American energy firms have run out of space to store it. So if there’s no place to bring the oil in, no one wants a crude contract that’s coming.
Underlining how critical the issue of the lack of storage is, the price of the futures contract was set at $20.43 per barrel a month later. The gap between the two contracts is by far the highest ever.
The Drastic Change Oil Price due to the Covid-19
The abrupt move showed just how over-supplied the U.S. oil market has come to a halt with the grinding of production and economic activity. This happens because governments across the globe are increasing shutdowns due to the rapid spread of the Covid-19.
An unprecedented production agreement to curb supply by OPEC and its allies a week ago is proving too little too late in the face of a one-third fall in global demand.
Oil prices have plummeted since the beginning of the year following the compounding impacts of Covid-19. And also, a breakdown in the initial OPEC+ deal. With no end in sight and producers worldwide continuing to pump, that’s causing a fire-sale among traders who have no access to storage.
Signs of weakness are everywhere. Just before the fall on Monday, Texas buyers paid as little as $2 a barrel for some oil streams last week.
Bankers in Asia are increasingly reluctant to give commodity traders the credit. It aims to survive as borrowers become more fearful of the possibility of a catastrophic default.