The oil market took a different turn on Monday after it fell it to its worst day on record. Since the coronavirus pandemic started, as feared, the demand for crude oil was certainly going to drop. But Monday, caused a turn of events as the oil prices fell beyond expectations.
There has been an increasing concern that the volume of oil held in the US storage is on a constant rise, while the demands are continually low. And for the first time, oil prices turned negative as producers had no space to store the oversupply of crude left in store. All of this is a result of the coronavirus which has brought global economies to a sharp pause. In only a matter of hours, the price of US crude oil dropped from $18 per barrel to -$38.
On Monday, the May contract of US West Texas Intermediate(WTI) futures dropped to $10.52 a barrel, down 42%. Earlier in the same day, the price fell $10.01 a barrel, making it its lowest level since 1986. While the June contract of WTI, though more actively traded, still dropped more than 9% to $22.70 a barrel. The international benchmark Brent crude traded at $26.53, around 5.5% lower on Monday.
The sharp fall in oil prices was triggered by the activities of traders who sought to trade by all means as the last day to trade oil in the May contract drew near. This was followed by a fast market decline over the past weeks which reached a fever pitch on Monday. As a result of these activities, oil prices fell as desperate oil traders that had insufficient storage for crude were forced to take action.
“The May crude oil contract is going out not with a whimper but a primal scream,” said Daniel Yergin, an oil historian.
The WTI May contract expired on Tuesday, this change of hands to the June contract may have had a slight impact on oil prices. In the early hours of Tuesday, US oil prices rebounded above negative, hitting $1.10 per barrel compared to its -$37.63 closing on Monday.
There has been a steady decline in the price of oil from the US shale heartlands in recent weeks. The Monday drop in oil prices ushered in a new wave of possibilities that oil prices could decline further if what happens at the end of the May contract repeats itself. Oil analysts also warn that the impact of the coronavirus pandemic can further cause oil prices to drop to their lowest level since 1995.
Monday officially launched the oil prices into the negative, and many oil companies are not taking any more chances as they consider shutting down their rigs and oil wells to avoid falling into debt or bankruptcy.
Over the weekend there was a striking record of 160m barrels of oil in storage in “supergiant” oil tankers outside the largest shipping ports in the world, including the US Gulf. The 2008-09 financial crisis is nothing compared to this, as only 100m barrels were stored at sea before offloading when the economy started to stabilize.