The price of US oil has dropped below zero for the first time in history, yesterday reaching minus $37.63 a barrel.
That means oil producers are paying buyers to take the commodity off their hands over fears that storage capacity could be exceeded during May.
Demand for oil has dropped dramatically as lock-downs across the world have kept people inside and not using transport.
As a result, oil firms have been forced to rent tankers to store the surplus supply and that has forced the price of US oil into negative territory. Shipping contractors have reported the largest super tankers now commanding $163,000 a day to sit idle off-shore and wait for a resurgence of demand.
Stewart Glickman, an energy equity analyst at CFRA Research was reported by the BBC as saying “This is off-the-charts wacky. The demand shock was so massive that it’s overwhelmed anything that people could have expected.”
The price crash on Monday this week was driven by the way the global oil market is structured. Oil is traded on its future price and May futures contracts are due to expire on Tuesday. Traders were desperate to offload those holdings to avoid having to take delivery of the oil and incur huge storage costs.
June prices for WTI were also down, but trading at above $20 per barrel. Meanwhile, Brent Crude – the benchmark
used by Europe and the rest of the world, which is already trading based on June contracts – was also weaker, down 8.9% at less than $26 a barrel, signifying demand is not expected to rise during May.
This historic reversal in pricing is a reminder of the strains facing the oil market and warned that June prices could also fall, if lock-downs remain in place. “I’m really not optimistic about the prospects for oil companies or oil prices,” Mr Glickman said.
OGUK, the business lobby for the UK’s offshore oil and gas sector, said the negative price of US oil could severely affect firms operating in the North Sea.
“The dynamics of this US market are different from those directly driving UK produced Brent but we will not escape the impact. Ours is not just a trading market; every penny lost spells more uncertainty over jobs,” said OGUK boss Deirdre Michie.
The oil industry has been struggling with both falling demand and fighting among producers about how much to reduce output. You may have seen reports in the news recently about Russia and OPEC starting a price war.
Earlier in April, a deal was finally agreed to cut global output by about 10%. Despite the deal being the largest cut in oil production ever to have been agreed, many analysts say the cuts were not big enough to make a difference.
For US drivers, the decline in oil prices – which have dropped by about 60% since the start of the year – has had an impact at the pumps, though not as dramatic as Monday’s drop in price might suggest.
“The silver lining is, if you for various reason actually need to be on the roads, you’re filling up for far less than you would have been even four months ago,” said Mr Glickman. “The problem for most of us is even if you could fill up, where are you going to go?”
US President Donald Trump has said the government will buy oil for the country’s national reserve. But concern continues are that storage facilities will run out of capacity, with stockpiles at Cushing, the main delivery point in the US for oil, rising almost 50% since the start of March, according to a report by ANZ Bank.
Mr Innes said: “It’s a dump at all cost as no one, and I mean no one, wants delivery of oil with Cushing storage facilities filling by the minute.”
So how does this affect prices in the UK?
We have already experienced the lowest prices at the pumps and in our gas prices for decades. This negative pricing in the US will have a knock on effect to the UK gas and oil industry but suppliers might not be able to capitalize on this.
UK gas storage has been drastically reduced over the last twenty years and the energy market has resorted to gas imports from across the world to satisfy peak demand, especially during winter.
We may see some small reductions in fuel and heating oil prices in the coming months, due to a lack of demand and the oversupply that is already in the system.
With oil producers already drastically cutting production, there will be a spike in prices as soon as the world gets back to normal and demand jumps before production can be built up again. Many experts are already forecasting an overall reduction in supply once the lock-downs are over as some smaller wells and oil fields become uneconomical to reopen.
In short, electricity prices will be largely unaffected due to continued infrastructure investment and high demand during lock-down.
Gas prices will stay low for now, not expected to drop any further but are likely to spike as soon as the lock-down is over.
Fuel prices will creep back up also.
Our advice for now is the same as always. If you have a gas contract due at anytime in the next 12 months, look for a new contract now and fix your prices for as long as possible. Prices have already been fluctuating slightly.
We are more than happy to help with this. There is no fee and we can do everything by phone and email.
For more information check out these BBC articles:
- Record deal to cut oil output ends price war
- Coronavirus: Who is still flying?
- Seafarers in limbo as coronavirus hits shipping
[email-subscribers-form id="1"] |