Everything You Need To Know About Fragile Crude Oil Market Due To COVID Crisis

On April 20th,2020 crude oil’s unprecedented week was acknowledged by traders as oil prices turned negative for the first time in history. It was a clear warning, showing the world how scarce storage space for oil is getting. In the 2nd week of March, most of the countries decided to shut down everything except essential commodities due to the novel coronavirus pandemic enforcing people to stay at their homes. The pandemic scenario provoked Saudi Arabia and Russia to go for a price war on crude oil prices. This unforeseen situation made most of us vulnerable with questions of how oil prices can turn negative? Why it has turned negative? How to deal with it? Is this going to happen again?

What negative price mean?

The price of a barrel of West Texas Intermediate (WTI), the benchmark for US oil, settled as low as — $37.63 a barrel which is down 305 per cent. That means oil producers are paying buyers to take their oil off their hands over fears that storage capacity could run out in near future — sounds crazy, impossible but this is the harsh truth of the current crude oil market.“It’s the worst oil price in history, which shouldn’t surprise us because it’s the inevitable result of the biggest flexibly and request dissimilarity ever,” said Ryan Sitton, chief at the Texas Railroad Commission, which directs the state’s refining industry.

What’s the reason?

The main reason behind this situation is the broken chain of demand and supply. Due to the unforeseen pandemic, people are locked at their homes; forced to adapt work from culture. This scenario puts a stop in transportation, people are not travelling, aircraft, vehicles, etc. are not moving; resulting in the demand to go down. Traders are not taking delivery of oils. Normally, if traders do not want to take delivery, they can simply sell the contract or roll it over to the next month.

However, due to the big supply glut and rapidly growing shortage of space for storing, nobody wanted to shop for up the contracts — resulting in a situation where traders were being paid up to $37 to take them on. Meanwhile, the shortage of space for storing at Cushing that triggered WTI’s sub-zero dive doesn’t look likely to enhance.

How does the oil market work?

The oil market is divided into 2 parts — 1. Physical market and 2. Financial market. Physical market means the oil itself but the financial market is different. It is made up of numerous contacts that are tied with various crudes and delivery dates. In simplers words, the financial market is a contact base market where traders sign a contract with a production firm for various crudes and this production firm supplies the necessities by the confirmed dates.

What’s happening with gasoline and oil storage?

Now gasoline and jet fuel are being consumed, and oil tanks are starting to fill up. Experts warned that global storage could fill up in late 2020. According to the Economist Intelligence Unit, gasoline stocks within the US have already passed 262m barrels, their highest ever levels. Big producers, which export the bulk of their oil, tend to possess far less space for storing than importers.

What OPEC is doing to handle the situation?

The organization of petroleum exporting countries aka OPEC plays a huge part in the determination of supply all over the world. It currently has 13 founding member countries which are Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Libya, United Arab Emirates, etc. In recent years U.S. outshines Russia and Saudi Arabia to become the world’s largest oil producer since 2018 which brings this tragic fall in the U.S. economy in 2020 due to the COVID crisis. All of these countries want to produce more crude for their countries as well as for export to other countries and get the highest market shares to outstand among themselves.OPEC struck a deal with Russia to reduce oil output by 9.7m barrels a day, nearly 10 percent of global production, in a bid to prop up the market in April 2020.

A price war between Russia and Saudi Arabia

In March 2020, Saudi Arabia, an individual from OPEC, the biggest exporter, and compelling inside the worldwide oil market, and Russia, the second most crucial exporter in the as of late framed OPEC+, neglected to agree about slicing creation to balance out the cost of oil. Saudi Arabia fought back by inclining up creation forcefully. These geopolitics had a lot more noteworthy effect on the oil business. This blast in gracefully occurred when worldwide oil request was drooping in light of the fact that the world was dealing with the COVID-19 pandemic. Because of all these geopolitics, the unrefined petroleum showcase needed to see the negative estimating without precedent for history.

Brent Crude and West Texas Intermediate (WTI)

Brent Crude trades oil in Northern Europe which sets the standard for international oil prices but West Texas Intermediate(WTI) trades a specific grade of oil in Cushing, Oklahoma which works as a domestic benchmark for oil prices. With the collapse of WTI, Brent Crude, another gigantic benchmark draws our attention. Could Brent Crude also go negative? This question pops up in our head. Luckily, it has not yet followed the WTI suit but Brent futures for May and June are trading at $13 and $17 respectively, and a further fall is very much a possibility. Brent has some extra cards to play which can save it in this ship sinking situation of the oil market. “Brent is made up of multiple crude grades and has natural egress to seaborne markets, and thus can chase global demand in a way that WTI cannot.” : said Rystad Energy analyst Louise Dickson.

Is it going to happen again?

First, the collapse in demand for oil has fallen as much as 30m barrels a day in April, according to the International Energy Agency (IEA) but in May the price of oil has steadily recovered, jumping by 90% increment in price registering as the best month in the record. However, the industry is still recovering from the pandemic which is witnessed from the big production cuts of the large players of the crude oil industry around the world. Some companies in the U.S. are getting bankrupt due to their high production cost. So it cannot be predicted that this scenario won’t come into the picture in the near future.