Il Oil prices suffered a historic collapse, the most dramatic ever. Monday the wtf, the benchmark crude oil in the United States, sank 148,55%, even going into negative territory: -37,63 dollars a barrel. On Tuesday morning the quotation then rebounded until it returned slightly above zero, a $0,56 a barrel. Still less than a bottle of mineral water.
To have a reference, just think that in early 2020 the price of West Texas Intermediate (the type of crude oil used as a benchmark in the US to determine the price) it was 60 dollars.
The reasons for the fall are various: above all, stock saturation accompanied by the ineffectiveness ofagreement reached in Opec+. After long quarrels, the big producing countries (first in line Russia and Saudi Arabia) have agreed production cuts of 9,7 million barrels per day, but only starting in May. Therefore, at the moment, there is no measure in place capable of compensating at least in part the violent drop in demand caused by the coronavirus pandemic.
Meanwhile, the storage capacities are really at the limit: not only are the depots now overloaded, but also the tankers parked at sea without a destination are running out of space to house new barrels.
Yes, but what does "negative price" mean when it comes to oil? In summary, those who extract oil no longer know where to put it, therefore – instead of selling it – whoever comes to get it pays. However, it needs to be emphasized that this situation pertained to Monday WTI May futures contracts, i.e. the US oil that is planned to be sold next month.
The contracts for the month of June already have completely different prices, around 20 dollars, evidently because the market expects a recovery in consumption with the start of the post-quarantine reopenings. From a speculative point of view, it is evident that buy at -37 to resell at +20 allows you to achieve formidable margins in no time. This is one of the ways the market allows you to profit from the pandemic.
Also, the historic collapse on Monday it did not involve Brent, ie the reference oil for Europe, extracted in the North Sea, which closed the session at 25,57 dollars a barrel, with a drop of 9,87%.
However, the scenarios remain extremely volatile. The negative prices indicate that in Texas and Canada "the holders of the May contract - Goldman Sachs analysts point out - have come to pay whoever could release them from their long positions to avoid physically receiving crude oil next month, when space of storage will be exhausted”. Looking at deliveries in June, the WTI dropped 0,1% to 20,41 dollars. Brent instead loses 10,32% to 22,93 dollars. The downward pressure, therefore, is bound to continue. In any case, Goldman Sachs predicts, “production will have to be reduced considerably to bring balance to the market, thus setting the conditions for a recovery in prices once demand has recovered”.
To learn more about negative prices and the prospects of the oil market, read the interview with Matteo Di Castelnuovo: “Oil prices are recovering but the road is long”.
According to GS, “the market will be forced to balance by June”, concludes the investment bank. The expectation is that the collapse of oil could force the producing countries to overcome their differences to agree on an output cut capable of balancing the slump in demand due to the global recession caused by the Coronavirus pandemic. So let's get ready for the roller coaster: "With the saturation of reserves, price volatility will remain exceptionally high in the coming weeks,” concludes Goldman Sachs. These are two decisive months and the market is questioning the impact of the new oil shock on companies' balance sheets and the prospect of seeing an increase in bankruptcies, particularly in the US shale oil sector.
Updated at 11:04 AM on April 21, 2020
