The price of the main U.S. oil benchmark fell more than $50 a barrel to end the day about $30 below zero. Demand for oil is collapsing, and despite a deal by Saudi Arabia, Russia and other nations to cut production, the world is running out of places to put all the oil the industry keeps pumping out — about 100 million barrels a day. At the start of the year, oil sold for over $60 a barrel but by Friday it hit about $20.
Prices went negative — meaning that anyone trying to sell a barrel would have to pay a buyer $30 — in part because of the way oil is traded.
What is Futures Contract Trading?
- Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset and have a predetermined future date and price.
- A futures contract allows an investor to speculate on the direction of a security, commodity, or a financial instrument.
“If you are a producer, your market has disappeared and if you don’t have access to storage you are out of luck,
Refineries are unwilling to turn oil into gasoline, diesel and other products because there is a steep drop in oil demand due to lock downs world over. Oil is already being stored in all possible places, including oil tankers, which are being hired as storage facilities.
The world has an estimated storage capacity for 6.8 billion barrels, and nearly all of that is filled, according to energy experts.
The huge drop in prices on Monday was exaggerated by the way oil prices are set.
When traders sell oil they guarantee delivery at a future time. Normally the price differences between oil for next month and the following one are relatively minor. But on Monday oil to be delivered next month, or May, was essentially deemed worthless. Oil set for delivery in June also fell but not nearly as much — more reflective of the market’s view on the current value of crude.
Storage is almost completely filled in the Caribbean and South Africa, and Angola, Brazil and Nigeria may run out of warehousing capacity within days.
Can the Oil Production be stopped?
But it will be hard to quickly fix the oil industry’s problems. The oil infrastructure is complicated and it’s not easy to turn off the taps. In addition, countries like Saudi Arabia and Russia, whose economies are reliant on oil, only reluctantly cut production. Shutting down oil wells and then restarting them when demand returns can require expensive manpower and equipment. Fields do not always recover their former production. In addition, some oil companies keep pumping, even if they are losing money, in order to pay interest on their debts and stay alive.
Brent crude, the oil price benchmark outside the United States used by much of the world, whose May contract has already expired, fell about 5 percent to a little under $27 a barrel.
U.S. oil producers are also reducing production, but not rapidly enough. At the current pace, American production will decline to less than 11 million barrels a day by the end of the year, from 13.3 million barrels a day at the end of 2019.
Many companies are already reporting substantial losses, and experts said businesses across the oil patch will have to seek bankruptcy protection in the coming months.
Such cuts should help stabilize the markets, but it might take months. The U.S. contract for oil delivered in May 2021 was trading on Monday at about $35 a barrel, hinting at how long it might take for prices to reach levels they were at just a few weeks ago.