Oil Prices – $40 Below Zero

Posted by James Hughes -
Scope Markets

Oil Prices Turn Negative for the First Time Ever

Of all the monstrous market moves we’ve had over the last few weeks Monday’s moves on the oil price will have to be up there as one of the most dramatic. On Monday, West Texas crude oil for May delivery saw prices plunge into negative territory and settle at -minus $37.63. Oil sellers must pay buyers to take the stuff off their hands.

So why is this happening? The global pandemic has caused a worldwide lockdown and crippling economies. With markets trying to make it, there is less demand for oil. Q1 of 2020 saw a global oil demand collapsing by one third while stockpiles increased by 48%.

There is now so much unused oil in the system that U.S. oil companies have run out of space to store it. The issue with the May contract that in fact expires today, Tuesday, is that nobody wants to take delivery of a contract of oil if there is nowhere left to store it.

It’s strictly the case that the there is nowhere left to store the commodity, but the storage is running incredibly low, and if the suppression of demand lasts any longer then by mid-May it is expected that storage will be full. This is what led the May futures contract to go out with an animalistic scream rather than a whimper.

OPEC+ Fails 

Leading exporters and producers, including the OPEC cartel and its allies such as Russia, have already cut production by a record amount. In the U.S. and elsewhere, oil-producing businesses decided on cutting output, yet the world has more Crude Oil than it can use.

Stockpiles at Cushing, the U.S. storage hub and delivery point of WTI Oil, has seen stockpiles increase by 48% to almost 55 million barrels since the end of February. The hub has a storage capacity of 76 million barrels, meaning it won’t be long until the storage unit is full.

Oil tankers are also running at maximum capacity. Many oil-producing companies keep the commodity at sea in tankers before it’s transported to its final destination. This is leading to a rise in transporting it and tanker companies share prices.

There is no quick fix for this problem, and the only relief will come when demand once again increases, and that all depends on how quickly Coronavirus passes. However, with hundreds of thousands of Americans ignoring social distancing rules, the U.S. could well be the epicentre for the health crisis for longer than many think.

Despite the weakness in headline prices, retail investors are continuing to plow money back into oil futures. The U.S. Oil Fund ETF saw a record $552 million come in on Friday, taking total inflows last week to $1.6 billion.

What Happens Next Month

The price collapse is reverberating across the energies industry. Crude explorers shut down 13% of the American drilling fleet last week. While production cuts in the country are gaining pace, it isn’t happening quickly enough to avoid storage filling to maximum levels.

We do have to put the move into a bit of perspective, the downside headlines and negative prices on an intraday basis are certainly on a biblical scale. However, they are mainly jitters around the expiry of the May 2020 futures contract. Nobody wants to be sitting holding a delivery contract for oil with nowhere to store it.

Will prices return to normal? Expectations are that demand will pick up in the coming weeks as lockdown begins to ease in some European countries and output picks up in China. However, at expiry oil futures tend to represent how much the commodity is worth right now, and in a month’s time, we expect demand to remain incredibly low. So even if we don’t see headline-grabbing negative prices, we could see prices drop incredibly low once again.

Share this article:

Disclaimer: This material is a marketing communication and shall not in any case be construed as an investment advice, investment recommendation or presentation of an investment strategy. The marketing communication is prepared without taking into consideration the individual investors personal circumstances, investment experience or current financial situation. Any information contained therein in regardsto past performance or future forecasts does not constitute a reliable indicator of future performance, as circumstances may change over time. Scope Markets shall not accept any responsibility for any losses of investors due to the use and the content of the abovementioned information. Please note that forex trading and trading in other leveraged products involves a significant level of risk and is not suitable for all investors.

Payment Methods

Scope Markets
Scope Markets
Scope Markets
Scope Markets

Awards

Scope Markets
Scope Markets
Scope Markets
Scope Markets

Scope Markets offers institutional and retail trading services to businesses and traders worldwide. Our top management team has more than 20 years of experience in the industry, and we are proud of the solid partnerships we built over the years. Whether it's a business or individual, Scope Markets has a wide range of trading solutions that are compliant, flexible, cost-efficient, innovative, and place the client first.

Contact Us

Registered address:
6160, Park Avenue, Buttonwood Bay, Lower Flat Office Space Front, Belize City, Belize

Email:
customerservice@scopemarkets.com

Tel:
+44 2030 516959

Risk Warning

Please note that forex trading and trading in other leveraged products involves a significant level of risk and is not suitable for all investors. Trading in financial instruments may result in losses as well as profits and your losses can be greater than your initial invested capital. Before undertaking any such transactions, you should ensure that you fully understand the risks involved and seek independent advice if necessary. Please read and ensure you fully understand our Risk Disclosure.

Legal Information

RS Global Ltd is authorized and regulated by the Financial Services Commission of Belize ("FSC") under the Securities Industry Act 2021 with registration number 000274/2.

Restricted Regions

Scope Markets does not offer its services to the residents of certain jurisdictions. Please read carefully our Restricted Countries document.

This website uses cookies to provide you with the very best experience and to know you better. By visiting our website with your browser set to allow cookies, you consent to our use of cookies as described in our Privacy Policy.

© Copyright 2022 Scope Markets. All Rights Reserved.