US oil prices have plunged into negative numbers for the first time ever.
The Covid-19 pandemic has brought about a dramatic decline in oil demand after many countries around the world enforced their own lockdown measures and encouraged people to remain at home.
Oil producers are now paying buyers to take oil to avoid storage capacity being exceeded over May. Some oil firms have rented tankers to store surplus supply, which has helped nudge prices over the line into negative numbers.
The benchmark used for US oil prices, namely the price for a barrel of West Texas Intermediate [WTI], has dropped to -$37.63 for May.
CFRA Research energy equity analyst Stewart Glickman called the numbers “off-the-charts wacky”, warning that US prices for June were also at risk of falling if the lockdown remained in force.
Glickman added: “The demand shock was so massive that it’s overwhelmed anything that people could have expected.”
Oil is traded on future prices with contracts for May due to expire on Tuesday this week. This triggered the plunge in prices on Monday as oil sellers have desperately looked to offload their assets to avoid having to incur storage costs when the next batch is delivered.
June prices for West Texas Intermediate have fallen but are trading well into positive numbers at over $20 per barrel, compared to May's negative prices.
Brent Crude prices, the European benchmark, is now trading based on June contracts. June prices fell by 8.9 per cent compared to May, down to under $26 per barrel.
Although US president Donald Trump has said that his government will buy oil for the US national reserve, there are lingering concerns over storage capacity in the US being exceeded.
ANZ Bank has reported that stockpiles at Cushing have gone up by nearly 50 per cent since the start of March.
In an effort to balance the market, OPEC [Organization of the Petroleum Exporting Countries] came to an agreement in April to cut global production by roughly ten per cent, the largest production cutback to have been agreed in history. However, analysts worry even that may not be enough to have a tangible impact.
Meanwhile, Deirdre Michie, who heads the OGUK lobby group for the UK offshore oil and gas industry, warned that shockwaves in the US market would also impact businesses operating in the North Sea.
Michie said: "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.”
