Oil price dips below zero as producers forced to pay to dispose of excess

  • US oil prices fall below zero on Monday, thanks to the coronavirus.
  • Oil price is expected to increase towards the second half of the year when governments of different countries lift travel restrictions.
Oil price falls below a dollar
Image source: https://flic.kr/p/2iSBx2b

The US oil price turned negative on Monday for the time in history as storage capacity was filling up. The coronavirus pandemic is responsible for the unprecedented oversupply of crude.

Besides, the price of US crude oil dropped within a matter of hours by 114% to -$38 per barrel. As a result, the only choice left to oil producers is to pay buyers to take the excess oil they cannot store. In addition, there’s an ongoing stockpiling of oil that threatens to submerge oil storage facilities.

Furthermore, Bjornar Tonhaugen, head of oil at research firm Rystad Energy said, the problem of imbalance in global supply-demand activities is now manifesting itself in prices.

Also, storage keeps filling up day after day as production continues to go unchecked. The world is not using as much oil as before. This due to the coronavirus outbreak, and now producers are beginning to see the effect.

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Over the weekend, they were reports that producers are using super giant oil tankers to store “a record 160 million barrels of oil” outside the largest shipping ports in the world. This is due to the coronavirus impact causing the fall in demand for oil in 25 years.

The last time a similar situation arose was during the 2009 financial crisis. Then, traders had to store over 100 million barrels at sea. They only started to offload stock when the economy began to recover.

The collapse in the US oil market – otherwise called West Texas intermediate price in the industry – accelerated because it was the last trading day for producers to trade barrels to be delivered next month when storage should reach capacity.

The reason behind the fall in oil price

The coronavirus outbreak is causing severe economic gloom, and this has started affecting the new US price for oil. The new price delivered in June should become effective starting from tomorrow, but it is now falling.

More so, there was an 8% fall to $25.79 in the price for Brent crude, the most commonly used benchmark.

Meanwhile, the continued standoff between US state governors and the president on reopening the economy directly affects the demand for oil.

Besides, experts believe that global oil prices should start to rise over the second half of the year. This is because governments will start to lift tight restrictions on travel to help contain the spread of coronavirus. Consequently, there will be an increase in demand for oil.

However, there is an agreement between the biggest oil-producing nations to keep from 10 million to 30 million barrels of daily oil production from the global market, starting in May. Also, with the mounting financial pressure, many oil companies will shut their Wells.

Regardless of the cut in production, most analysts believe oil prices will fail to reach the same level as the beginning of the year, before the outbreak.

In January, global oil prices rose to $69, under the Brent crude measure. It later plummeted to $23 at the end of March.

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