US crude oil price has dropped to their lowest level in more than 17 years following falling in demand due to the Coronavirus crisis creates a surplus that risks overwhelming storage capacity.
In this time, the global oil industry is suffering its biggest demand fall in history, with traders and analysts anticipating crude consumption could fall about a quarter next month due to extensive lockdowns across the western world as the virus pandemic.
Actually, US crude oil price quickly dipped below $20 and faced its lowest level since 2002 because of concerns that the global coronavirus shutdown could last months and demand for fuel could decline further.
In Canada, the price of a barrel of oil fell below the cost of shipping it to a refinery – $5 – making it more economic for producers to shut down their wells than plummet to “negative prices”.
West Texas Intermediate futures that are the main U.S. crude gauge, were down 6.5% at $20.11 a barrel after hitting their lowest level since February 2002 on Monday. Brent crude, the global benchmark, decreased 6.4% to $26.18 a barrel.
Demand for oil is anticipated to shrink 15 million to 20 million barrels per day as more countries impose or increase lockdowns to combat the outbreak of the COVID-19.
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Meantime, Saudi Arabia and Russia showed any signs of backing down from rising supply amid a continuous price war. A delegate told that OPEC nations, Saudi Arabia amongst them, are opposed convening an emergency panel on tanking prices.
Lachlan Shaw, National Australia Bank’s head of commodities research, reported, “OPEC, Saudi Arabia, and Russia could mend their differences, but there’s not that much OPEC could do…The demand shock from COVID-19 is just too big. The reality is global storages will fill up in a couple of months if nothing changes, and that will have all sorts of disruptive impacts on pricing.”
Vivek Dhar who is a commodities analyst at Commonwealth Bank of Australia admitted as he told Bloomberg, “Demand concerns are critical but well known, what really took the market down were the signals we got from Saudi Arabia and Russia that they intend to continue their current path. Market hopes of a deal have come undone.”
Higher cost producers such as US shale and Canadian tar sands are broadly unprofitable at these price levels.
Companies will hope other producers shut off production first.
This oil price dropping could make a quick reckoning in the industry. US energy producers now made the greatest cut to the number of drilling rigs operating in five years last week, based on data from Baker Hughes.
Analysts show that the US oil industry, which grew in the last decade to make America the world’s first oil producer, could contract as much as 2.5m b/d by the end of 2021, from approximately 13m b/d of crude output now.
The price of oil is now so low that it is becoming unprofitable for many oil firms to remain active, analysts said, and higher-cost producers will have no choice but to shut production, especially since storage capacities are almost full.
“Global oil demand is evaporating on the back of COVID-19-related travel restrictions and social distancing measures,” said oil analyst Giovanni Staunovo.
“In the near term, oil prices may need to trade lower into the cash cost curve to trigger production shut-ins to start to prevent tank tops to be reached,” he continued.
Rystad Energy’s head of oil markets, Bjornar Tonhaugen, said: “The oil market supply chains are broken due to the unbelievably large losses in oil demand, forcing all available alternatives of supply chain adjustments to take place during April and May,” including cutting refinery runs and increasing onshore or offshore storage.
Supertanker freight rates are rising for a second time this month as traders rush to secure ships for storage.
Goldman Sachs analysts said demand from commuters and airlines, which account for about 16 million barrels per day of global consumption, may never return to previous levels.
The contango spread between May and November Brent crude futures reached its widest ever at $13.45 a barrel, while the six-month spread for U.S. crude broadened to minus $12.85 a barrel, the widest discount since February 2009.
Prompt prices are lower than those in future months in a contango market, encouraging traders to store oil for future sales.
Central banks and governments continued with attempts to support their economies but analysts questioned the effectiveness of their measures. JP Morgan predicts global GDP will contract at a 10.5% annualized rate in the first half of the year.
On Monday, central banks in China and Singapore aggressively eased monetary policy, while Malaysia’s government unveiled a $58 billion stimulus package over the weekend.