Cause and effect of US oil prices entering negative territory

No one would have ever thought that producers would be paying the buyers to purchase their goods. The world saw this uncommon phenomenon become a reality on Monday, when the US oil prices tumbled down into negative territory, hitting minus $37.63 a barrel.  The US benchmark for crude oil, West Texas Intermediate (WTI) fell below zero as the novel coronavirus lockdown dried up demand throwing oil demand and supply off balance.

Technically the issue is less about slump in demand and more about lack of oil storage. Oil is traded in market in future prices and May futures contracts were getting expired on Tuesday. It resulted in traders opting for selling their holdings than taking in oil delivery which would have led to higher storage cost. CME Group’s New York Mercantile Exchange, in which WTI future contracts are traded, said, “Today’s negative settlement price in the May WTI futures contract reflects both the global oversupply of crude oil and high levels of storage utilisation in the United States,”

As the sense of panic settled and oil crawled back over zero, analyst observed that it would not damage the US energy sector in short run, but affect brand’s image as an unsafe investment commodity, which led to drop in investor confidence. It also led to drop in June prices for WTI, bringing their trading at over $20 per barrel.

In order to restore normalcy in the economy, the authorities need to lift the lockdown as it would turn up the consumption. But given the uncertainty around the global pandemic oil market is bound to take a beating for now. To save the energy sector from any further damage, the government authorities need to stop oil fields from producing any further and increase its storage capacity as soon as possible. Currently, the US on its own is producing 2million barrels/day, far more than its slowing refineries need.

The historic dip in oil prices, made the industry realised the futility of the recent oil deal between OPEC plus nations, which US President Donald Trump called, ‘a great deal of all’. Though, no doubts about it being a big deal as the Organisation of Petroleum Exporting Countries agreed for the first time to collectively cut the oil production by 10%. Probably 10% wasn’t enough to protect the oil industry from spiralling downwards. It was no less than a shock for Mr Trump as he personally pushed the deal in order to save US shale sector.

The few options which now lay in front of the federal government are – urging OPEC for further cuts in the production, levying higher tariffs on oil imports; providing more storage capacity at zero cost, including in the Strategic Petroleum Reserve (SPR); providing economic stimulus to oil companies and paying producers to halt production. Through the US government has discussed these options before at various levels, but is yet to take a final call over which ones are viable in the current scenario.

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