The historic crash into negative prices for US crude oil futures should be seen as a warning for other oil producers worldwide as the coronavirus pandemic plays havoc with the economy, even though it was mostly the product of market technicalities and localized storage issues in the US market, experts said.
WTI contracts for crude set to be delivered next month hit a low of -$40.32 per barrel, a first for the benchmark, as traders rushed to offload ownership and producers paid buyers to take crude off their hands. But Brent crude, the main benchmark used for Middle Eastern oil, continues to trade in the mid-$20s.
“It is indicative that lower prices possibly much lower prices are on their way for all oil … I don’t think we'll see a squeezing in Brent going into negative prices because Brent is seaborne crude and has a lot more options, but we would certainly expect Brent to go significantly lower,” said CEO of Qamar Energy Robin Mills.
The US market collapse was driven by a lack of storage space at the delivery point of the US oil futures contract in Cushing Oklahoma, and the expiry of the May futures contract expected later on Tuesday.
But industry executives in the Middle East said the plight for WTI was an important yardstick for the global industry to take note of.
“It’s a warning signal for everyone else out there,” said Chris Wood, managing director at energy company Uniper’s office in Dubai during a conference call on Tuesday.
US oil producers are already under pressure from low oil prices, with some already declaring bankruptcy. Many analysts expect oil demand to recover in the third and fourth quarters of the year, but this is still highly uncertain.
Saudi Arabia and Russia, two of the largest oil producers in the world, both said Sunday they are open to further output cuts to stem crude’s downward spiral.
The world’s top oil producers pulled together a historic deal last week that should remove about 20 percent of current oil production for two months from world markets to face up to the evaporation of global demand.
This may no longer be enough, however.
“We might start to see more permanent shifts in consumer behavior … and we aren’t necessarily going to get a pop back in demand once lockdowns end,” said Edward Bell, the head of Emirates NBD Research.
Meanwhile, the US has yet to mandate cuts for its oil industry. The Texas oil and gas regulator is due to decide Tuesday if it will mandate supply cuts, the state accounts for 40 percent of US production.
Mills said the cuts in US oil production would likely be driven by economics rather than a government-ordered shutdown.