By the time most Indians woke up on Tuesday morning, crude oil prices had fallen below zero for the first time in history. A negative price suggests sellers were paying buyers to take deliveries. Why? To avoid incurring of storage cost, as oil demand crashed globally.
It’s pretty clear as to what forced this sudden fall in prices. So much so that the sellers have to pay to keep the flow in check. The steep crash in the oil market comes as many of the world’s major economies are still locked down. Due to the coronavirus outbreak, the global demand for crude oil has plummeted by as much as a third. Decreased demand has led to a massive oversupply of oil. Buyers are now faced with concerns about where to store the surplus.
The most major halt witnessed in the same scenario was when the Saudi oil tankers holding almost 40m barrels of oil were thought of to be left stranded off the US coast as Donald Trump considered a block on crude imports to help prop up the US oil market.
A flotilla of 19 supergiant Saudi oil tankers – each capable of holding 2m barrels of oil– was reportedly en route to the US. But storage facilities were already overwhelmed by a flood of unwanted crude. Gathered from different sources, the tankers were reported to be laden with seven times more Saudi oil than the kingdom usually ships to the US Gulf coast. This is raising concern that the ‘oil dumping’ would add to the US oversupply triggering the first negative crude oil prices in history that were ever seen.
Reactions in the US
US officials are reportedly considering steep import tariffs on oil imports, or a block on incoming tankers. This would help ease the glut of oil. The measures may be put in place. Also, Trump’s plan to use government funds to buy domestic crude will be implemented to help keep the industry afloat.
“It’s a grim situation playing out in the oil market, grabbing the eyeballs of the entire investor fraternity and defying logic”, said Sugandha Sachdeva VP for Metals, Energy & Currency Research, Religare Broking.
US Senator Ted Cruz said on Twitter on Tuesday: “My message to the Saudis: TURN THE TANKERS THE HELL AROUND”. The tweet itself showed a clear message to the oil producers that they don’t want anything to with the crude. Also, the May contract has been canceled.
Right now while the lockdown continues to keep the complete country shut, crude oil stands at -37.63 dollars per barrel. Refiners are rejecting oil supplies at a historic rate. Since no activity anywhere is happening there is no way to use the oil whatsoever. Moreover, even if Trump gets a sufficient area for oil storage he won’t spend such billions of money on something not needed in the time of such critical conditions so as to keep the economy in check.
From verified resources, it’s reported that Trump has planned onto buy some of the produced oil if needed. But the rate should be reduced half to 20.43 dollars per barrel the next month. And with US storage sprinting to the brim, market forces will inflict further pain until either the US hits rock bottom or COVID clears.
How this will impact the economies and the future prices of oil in the world is yet to be seen.
Read more about us here.