US oil trading collapsed on April 20 as the price of May’s future contract for West Texas Intermediate (WTI) – that is due to expire on April 21 – fell by over 300%, recording an unprecedented $-37.63 per barrel on April 20 against April 17’s $18.27 per barrel.
This means that sellers are paying buyers so as not to be burdened by surplus of oil. The June contract also fell by 10% recording $22.05 per barrel and Brent crude fell by 5% recording $26.50 per barrel.
Coronavirus (COVID-19) has created turmoil in global economies, causing a fickle imbalance in the supply and demand equilibrium. This has resulted in an abundance of unused oil supply and affected US energy companies as they run out of storage capacity.
The US main storage and delivery point of the WTI contract, Cushing, have jumped 48% to almost 55 million barrels (mmbbl) since the end of February, despite having a working storage capacity of 76 mmbbl as of September 30, 2019, according to the Energy Information Administration.
In response to the price drop, US President Donald Trump, restated that there might be plans for the US to open the federally-controlled strategic petroleum reserve to store excess oil that cannot find a home in commercial storage facilities. Trump has initially proposed the idea earlier, however, the Congress denied the funding of federal purchases of crude oil.
“We are filling up our national petroleum reserves, the strategic reserves, and we are looking to put as much as 75 mmbbl into the reserves themselves that would top it out,” Trump said during the daily news conference. He added that “we are going to either ask for permission to buy it, or we will store it, one way or the other, it will be full.”
The price collapse has created a ripple effect across the oil industry, as crude explorers shut down 13% of the US drilling fleet last week. Paul Horsnell, Head of Commodities at Standard Chartered, commented that current production cuts are not enough to avoid storage filling to maximum levels.
Michael Tran, Managing Director of Global Energy Strategy at RBC Capital Markets, said that “refiners are rejecting barrels at a historic pace, and with US storage levels sprinting to the brim, market forces will inflict further pain until either we hit rock bottom or COVID-19 clears, whichever comes first, but it looks like the former.”
Analysts have warned about a decline in oil demand, as a result, production cuts have been strategized. On April 12, the Organization of the Petroleum Exporting Countries and its allies (OPEC+) convened and agreed to cut production by 10%, however, analysts have predicted that these cuts will not be sufficient amid the current crisis. Tom Kloza, Chief Oil Analyst for the Oil Price Information Service, commented that “this cut is woefully inadequate to stabilize prices into at least the summer,” according to CNN.
Stephen Innes, Chief Global Market Strategist at Axicorp, remarked that “it has not taken long for the market to recognize that the OPEC+ deal will not, in its present form, be enough to balance oil markets.”
Michael Lynch, President of Strategic Energy & Economic Research Inc., said that “people are concerned that we are going to see so much buildup of inven2tory that it is going to be very difficult to fix in the near term… People are trying to get rid of the oil, and there are no buyers.”
Rystad Energy told CNN that if the oil prices remain at the $20s, approximately 533 US oil exploration and production (E&P) companies will file for bankruptcy by the end of 2021. If prices reach the $10 mark, it is expected that more than 1,100 will file for bankruptcies.
Oil prices have been swindling since the pandemic outbreak, noting that at the beginning of 2020, the WTI recorded $63.27/bbl, crude oil at $68.91, and OPEC basket at $70.87.