What Does Negative Oil Price Actually Mean?
Apr 26 2020 Read 353 Times
Last week, the price of West Texas Intermediate (WTI) futures oil contracts slipped below zero for the first time in history. The decline into negative territory was a response to the most drastic drop in demand seen in 25 years, a trend that was triggered by the COVID-19 pandemic. It saw sellers rushing to abandon May contracts which resulted in WTI, the US oil benchmark, nosediving to - US$4.47 a barrel. The prices meant that if producers wanted to exit the market, they were forced to pay traders to take oil off their hands.
Storage is the heart of the issue, with capacity for crude oil rapidly depleting as airlines, transport companies and other key buyers experience a drastic drop in demand. With purchasing down, United States storage capacity has quickly filled up and left producers with a surplus. Essentially, producers continued to pump oil faster than it could be sold or stored, which forced futures prices to plummet below zero.
Traders look ahead to May oil futures contracts
One of the most important drivers was the fast that Tuesday April 21 marked the last day of trading for West Texas Intermediate (WTI) crude oil futures contracts in May. The contracts outline how much oil will physically change hands in May, with companies well aware the United States will still be in COVID-19 lockdown and demand for fuel will remain low next month. The impact on WTI spreadsheets was crushing, with the US benchmark suffering a decline of more than 100% from the US$63.27 high seen in early January.
What's ahead for June futures?
Following the negative prices of - US$4.47 a barrel seen on April 20, producers are now trading June WTI contracts. While analysts are hoping for a recovery, prices have already started to slide, with WTI trading at around US$14.60 per barrel. Brent crude, which is sourced from the North Sea, hasn't been hit quite as hard though has still dropped to US$19.67 a barrel. The stability is largely thanks to storage, with Brent producers still enjoying ample access to storage tanks and ships in the North Sea.
While prices for WTI and Brent have both suffered, motorists may not enjoy the same savings. The RAC predicts petrol forecourts will attempt to hold prices at around £1 per litre in a bid to stay afloat during the COVID-19 pandemic. Simon Williams, a spokesman for the RAC, also says petrol demand in the UK has slumped due to travel restrictions and the 'stay at home' order, meaning retailers are selling much less.
The COVID-19 pandemic has sent shockwaves through the oil and gas sector and the lubricant industry is no exception. For a closer look at how the industry has been impacted by the pandemic don't miss 'Coronavirus Creates a New Dawn for the Lubrication Oil Sector' with commentary from Koehler Instrument Company representatives.
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