U.S. oil prices fell into negative territory for the first time in history as demand evaporates from the Coronavirus pandemic left the world inundated with oil and insufficient storage capacity, which means producers are paying buyers to get rid of it.
West Texas Intermediate, the US benchmark, traded as low as -40.32 $ per barrel in a day of chaos in the oil markets. The settlement price on Monday was – $ 37.63, down from $ 18.27 on Friday. Merchants have capitulated to limited access to storage capacity across the United States, including the country’s primary delivery point of Cushing, Oklahoma.
The collapse will be a blow to Donald Trump, who has gone to great lengths to protect the oil sector, including supporting OPEC and Russian measures to reduce production and by committing to support the industry.
After the price drop, Mr. Trump reiterated the United States’ plans to open up the federally controlled strategic oil reserve to store excess oil that cannot find a place in commercial storage facilities. Congress refused to fund federal crude oil purchases when the White House first proposed the idea several weeks ago, but the Department of Energy also considered the possibility of leasing capacity from producers.
“We are filling our national oil reserves, strategic reserves, and we are looking to put up to 75 million barrels in the reserves themselves to supplement,” Mr. Trump said at his daily press conference. “We’re either going to ask permission to buy it or we’re going to store it, somehow it’ll be full.”
The shale sector has transformed the United States into the world’s largest oil producer over the past decade, providing the president with a foreign policy tool he has brandished as “American energy dominance,” but which is now facing a rapid decline.
Negative prices are the latest indication of the depth of the crisis hitting the oil industry after lockdowns imposed on many major economies around the world caused demand for crude to drop by up to a third, leaving the industry to contend with it. that Jefferies analyst Jason Gammel called “the bleakest oil macro outlook” he has ever seen.
Not all oil contracts are traded in negative territory. Brent, the international benchmark, lost 8.9% on Monday at $ 25.57 a barrel, but is less immediately affected by storage issues.
Brent is a marine crude that allows traders to easily ship it to areas of high demand. Amrita Sen of Energy Aspects said, “With Brent you can put it on ships and immediately move it around the world. Cushing’s storage tanks, however, will be full in May. “
WTI contracts for June delivery fell 14.7% but held above $ 20 a barrel, although traders warned it could face further losses. Both benchmarks were trading above $ 65 a barrel in January.
Stephen Schork, editor of the oil market newsletter The Schork Report, said he expected access to storage capacity in the United States to be exhausted within two weeks – and warned that the collapse in the country’s oil consumption was accelerating.
“It just gets uglier and uglier from here,” Mr. Schork said, adding that the sharp rise in unemployment meant that fewer and fewer Americans would be driving, hurting gasoline demand even during the months. highest summer.
“This summer died on arrival. The most requested months will not happen, ”he said.
Prices for physical qualities in many parts of North America have fallen to the lower single digit range, reflecting a shortage of buyers able to take delivery of oil, although subsequent contract prices have held up slightly better due to of some investors betting on a possible rebound.
Traders speculated that traders who had successfully leased storage were pressuring their rivals without access to storage yards. This could allow them to source ultra-cheap oil for their storage tanks, before locking in much higher prices in the futures market, essentially being paid to take oil and then selling it a month later. for over $ 20.
Traders said onward delivery contracts were backed by hopes that the worst of the demand destruction could be over by the summer, if lockdowns and travel bans were relaxed. But others question whether the record spreads between spot transactions and contracts for onward delivery are lasting.
Crude prices have fallen this year due to the possibility of the coronavirus outbreak causing a deep global recession. The number of Covid-19 infections worldwide topped 2.4 million on Monday, according to data from Johns Hopkins University, with more than 165,000 deaths.
The latest developments “have painted a grim picture of a world still firmly in the grip of the coronavirus crisis, amplifying concerns over declining demand for oil,” said Vandana Hari, founder of Vanda Insights, a research firm energy company based in Singapore.
US stocks were down, partly because of weakness in energy stocks like ExxonMobil and Occidental Petroleum, but also because of growing gloom about how long it will take the country to fully emerge from lockdowns. The S&P 500 closed down 1.8%. The energy sector lost 3.3 percent.
In fixed income securities, the 10-year US Treasury yield was 0.04 percentage point lower at 0.62%.
Previously, Asian stock markets were under pressure. Japan’s benchmark Topix fell 0.7% and Australia’s S & P / ASX 200 fell 2.5%, while Hong Kong’s Hang Seng fell 0.2%.
European indices stabilized, with the continent-wide Stoxx 600 closing 0.7% higher, while London’s FTSE 100 and Frankfurt Dax gained 0.5%.
The fall in oil prices has deepened despite an OPEC-backed agreement aimed at reducing the world supply of crude by around 10%. Reductions of varying magnitude are planned until April 2022 as part of price stabilization efforts.
Mr Trump has reconsidered the prospect of imposing tariffs on Saudi oil shipments to the United States in order to force the kingdom to cut production, an idea supported by the shale rulers who pressured the president to gain his support in recent weeks.
“We certainly have a lot of oil,” the president said when asked about the idea. “So I’ll watch this.”
Baker Hughes data on Friday showed the number of active oil rigs in the United States fell by more than a third over the past month. But signs of reduced supply in the United States have done little to push prices up.
“Too much oil, with nowhere to put it,” said Kit Juckes, senior strategist at Société Générale in London, noting that “oil-sensitive currencies are under pressure again”.
Additional reporting by Daniel Shane in Hong Kong and Lauren Fedor in Washington