For the first time ever a barrel of oil was traded at negative prices earlier this week – in other words, buyers actually received money to take the oil, as much as USD 38 per barrel.
So-called May futures (the price for oil deliveries in May) on US WTI oil expired – but demand for US crude was at rock bottom and US oil storage facilities were full, which meant investors had to pay to offload their futures contracts.
“Oil prices collapsing is no great surprise at the present time. Demand has plummeted as a natural consequence of a world overshadowed by the corona crisis. But we did not expect negative prices – an unprecedented event, though we should remember the oil market is highly speculative,” explains Danske Bank’s investment strategist, Lars Skovgaard Andersen.
Absolute low
The extremely low demand for oil is due to China only now beginning to pick up again after its coronavirus outbreak, while economic activity is probably at an absolute low right now in both Europe and the US. Millions of cars are off the roads at the present time, thousands of planes are grounded and a generally weaker demand for goods is reducing the need for oil in the manufacturing and transport sectors.
After the May futures expired, the price of June futures became the new reference point for US WTI oil, and June futures are trading in positive territory, though at a very low level of around USD 15 per barrel as we write. Brent oil prices from the North Sea, which are the reference for Middle East oil, were initially sliding this week, though they are far from negative territory at around USD 22 per barrel after rising in recent days.
“These are still crazy prices, but we expect oil prices to rise as economies reopen and gradually begin to pick up, while the low prices will likely also result in lower production and hence reduced supply,” says Lars Skovgaard Andersen.