The price of US oil, the coveted black gold, suffered a collapse on Monday so dramatic that it closed the day costing less than $ 0 … for the first time in its history. A specific contract ended the day at – $ 37.63, something unthinkable before the coronavirus pandemic practically dried up the demand for fuels worldwide.
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The benchmark contract for the United States market, oil West Texas Intermediate (known as the WTI), whose barrels are due to be delivered in May, is close to expiring, in part sparking the fierce liquidation never seen before.
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A surreal situation. Since that contract closed on negative ground, that in practice means that sellers of that oil are paying for someone to take the barrels. That only applies to that contract, the one for the barrels for delivery in May, since the subsequent contracts registered losses but did not fall in the red.
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The sharp general drop in oil prices should in turn cause a drop in gasoline prices at service stations, although it will still have to be seen when and how much it falls. Gasoline prices have already dropped about $ 1 when compared to the same date last year, according to the AAA.
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Beyond the technical issue that encouraged the liquidation of the contract that fell to less than $ 0, for the moment there is a cause that flies over the oil markets and that will probably continue to do so: the demand for fuels and, therefore, for crude oil has declined. collapsed amid a pandemic that has forced people to stay home and cancel their trips.
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This has caused the warehouses where oil barrels are ‘kept’ to fill, which often makes investors nervous as it is an indicator of weak demand.
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Ships full of oil in the sea
In the United States, the warehouse that is used as a barometer is in Cushing, Oklahoma. There, 76 million barrels can be ‘stored’. And, as of the most recent report as of April 14, there were 60.6 million barrels, analyst Phil Flynn explains in this Price Futures Group report. Those warehouses are likely to continue to fill up because, according to analysts, no one wants oil right now.
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Once full, buyers prefer to pay for someone to take the crude because there is no space to store it. That was partly the logic of what happened this Monday with that contract that dropped to less than $ 0.
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“And it is not just (the warehouse in) Cushing that is filling up. Reuters reported that market operators are storing an estimated record 160 million barrels on ships, double what it was two weeks ago,” explains Flynn. .
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The main producers agreed a few days ago to cut their pumping of crude, however, the agreement reached after weeks of fights between some of them, especially between Russia and Saudi Arabia, has done little to alleviate fears about the demand debacle. Fears that linger as people are forced to stay indoors to contain the spread of covid-19, the disease caused by the coronavirus.
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And also while the economies do not recover from the fatal blow that the virus has dealt them. That of the United States, the largest in the world, would fall more than 6% this year, a percentage that doubles that of the fall of the 2008 financial crisis, according to estimates by the International Monetary Fund.
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