The oil market witnessed a "shock” after US WTI crude’s May price fell to US$-37.63 per barrel. Although the price of oil bounced back to over US$0 per barrel after that, the oil market turbulence has caused a lot worries for investors.
Despite a new agreement on production cuts, oil prices have plummeted due to oversupply in the markets and depleted stockpiles. The fact that investors have to sell off has put pressure on oil prices. Negative prices are said to signal that traders will have to pay to take out oil as the oversupply is challenging storage capacity. WTI crude oilis currently unable to find a "destination” because of oversupply. Currently, traders are focusing on June contracts, with a 30-time higher transaction volume.
The world oil market has continuously plummeted in recent weeks due to blockade and travel restrictions imposed in many countries around the world, leading to a sharp drop in oil demand. The oil price crisis worsened when the dispute between Saudi Arabia and Russia occurred prior to the Organisation of the Petroleum Exporting Countries (OPEC) and its partners reaching an agreement to cut production to 9.7 million barrels per day. Reserves have hit the ceiling, making OPEC+'s decision to cut production insufficient to pull oil prices back up. Oil prices fell into the "negative zone” on April 20, causing concern and further negative economic consequences.
With this record decline in oil prices, many US oil companies are in danger of bankruptcy as most of the oil giants borrowed heavily in previous periods. According to Rystad Energy, a market research company, if the oil price is at US$20 per barrel, by the end of 2021, as many as 533 US oil production and exploitation companies will have to file for bankruptcy. In a case where the oil price stays at US$10 per barrel, more than 1,100 companies will fall into this disaster.
Economic and technological activities have stalled, resulting in a sharp drop in world oil demand. Oil refineries processing is less than normal, sending hundreds of millions of barrels into warehouses around the world. Some traders even had to hire anchoring ships just to store excess oil. Currently, there are about 160 million barrels being kept in storage around the globe. The US oil market also witnessed an oversupply with oil stocks in inventories in Oklahoma increasing by 9% last week, to about 61 million barrels.
In the context of the current excess supply, Deputy Chairman of the Security Council of Russia D. Medvedev said that Russia is ready to discuss with partners to sell oil on a take or pay basis. Meanwhile, US President D. Trump is considering a decision on stopping crude oil imports from Saudi Arabia. The Trump administration is also planning to increase its 75 million barrels of oil reserves, while the US Department of Energy is conducting procedures to allow domestic petroleum companies to rent national reserves. Currently, four underground storage facilities along the Gulf of Mexico in Texas and Louisiana are only able to store a maximum of 727 million barrels of oil.
Although Russia, the US, and Saudi Arabia are "shaking hands” to maintain the stability of oil prices, forecasts of reduced consumption and oversupply have had an unprecedentedly negative impact on the oil market. Oil prices continued to plummet after OPEC forecasted that demand for oil would decrease by 6.9 million barrels a day, or 6.9% in 2020. In April alone, OPEC forecasted demand would decline the most, with 20 million bpd. However, this forecast is not as serious as the forecast issued by the International Energy Agency (IEA), the demand in April predicted to decrease by 29 million bpd and the whole year will drop by 9.3 million bpd.
The efforts made by OPEC+ together with the US have not stopped the decline of oil prices. According to analysts, the agreement of OPEC+ is not enough to balance the oil market. Perhaps, the "oil giants” need to make agreements to cut production more drastically, however, the market also depends on consumption. The serious imbalance between supply and demand has pushed the oil market into its darkest period in history.
Source: NDO
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