Yesterday was a historic day for the oil industry with prices crashing and going into negative territory for the first time
West Texas Intermediate crude fell to negative US$36.20 a barrel and the dramatic drop meant that oil traders would have to pay buyers to take the oil or risk taking delivery of the oil despite storage being at a premium. At the time of writing, Brent crude was trading at US$25.57 a barrel, with prices climbing back into positive figures by the end of trading yesterday, but this price crash has sent shockwaves across the industry.
Rystad Energy’s head of oil markets, Bjornar Tonhaugen said that the physical market was “broken beyond recognition” as the market realised that the “storage wall is already being hit.”
“The front month NYMEX WTI contract has defied gravity and what was previously perceived as a normal positive level, by trading below negative US$40 a barrel yesterday in its second-to-last trading day before trading in the contract seizes.
For the futures contract, which has physical delivery of 1,000 bbl of WTI-like crude attached to it if the holder’s position is not closed out before trading seizes, contributed to the worst dislocation of price of the world’s most important commodity yesterday, delivered during May 2020 at Cushing, Oklahoma. Essentially, with 108 million barrels worth of contract positions still not closed by the traders in the market, the buyers were rushing for the door to avoid taking physical delivery of crude at Cushing in May – because ‘where am I going to store that oil’ when remaining available storage capacity is believed to run out during the next few weeks. The swings were most likely exacerbated by algorithms and open contracts by indices and ETFs, resulting in a market with ‘no buyers’ and a lot of sellers,” Tonhaugen said.
The pressure on the oil storage sector has been increasing well before yesterday’s news with Jim Burkhard, vice-president and head of oil markets, IHS Markit, commenting on 10 March: “Quite simply, global production has been on a pace to exceed available storage capacity. Something has to give. And it will. Signs point to a forced 10 million barrels per day cut in world oil production.”
Since Burkhard’s remarks, OPEC and OPEC+ countries agreed to a production cut but this resulted in a mixed reaction from industry analysts as to whether this would mitigate the impact of low oil prices, particularly as a result of the global COVID-19 pandemic. Mihir Kapadia, CEO of Global Sun Investments commented: “The scale of the cuts, while impressive as OPEC+’s largest-ever agreement, likely won't be enough to offset the complete collapse in oil demand taking place in major economies.”
