Oil futures are collapsing with prices going as low as $1 per barrel. The rout is due to a confluence of factors. Prices for futures contracts even dropped into negative territory this afternoon. Negative pricing means that some producers are paying buyers to take their oil rather than having to shut down wells.
Futures contracts are expiring on Tuesday. In a nutshell, the slowing economy and a glut of oil supplies are driving holders of those contracts to dump them at rock-bottom prices. The sell-off has driven prices lower than $1 per barrel for West Texas Intermediate (WTI) crude, a benchmark grade. The bargain price is equivalent to a loss of more than 90 percent of WTI’s value. CNBC notes that Monday’s trading is the worst day for WTI since the contract’s inception in 1983.
Oil prices had already taken a beating this year with a price war between Russia and Saudi Arabia. The Saudi maneuvering in March caused a sharp drop in prices that coincided with the onset of the Coronavirus pandemic in the US.
After the pandemic led to shelter-in-place orders for much of the country, oil prices dropped further. Decreased demand due to idle factories and fewer vehicles on the road contributed to a 60 percent drop in the price per barrel between February and mid-March. An internet meme recently asked, “Anyone else’s car getting three weeks to the gallon now?”
Demand is now being further dampened as oil storage facilities reach the limit of their capacity. Now filled to the brim with cheap oil, they don’t have room for more no matter how attractive the price.
As of this writing, WTI futures are trading at $0.78 per barrel while Brent crude is trading at $26.53. June futures for WTI appear much more stable at $22.31. Both the June WTI and Brent contracts are down slightly, but it is the May WTI futures that have completely collapsed.
The relative stability of the June contracts indicates that traders foresee an increase in demand over the next few weeks. As the country emerges from isolation, factories will restart and people will start driving to work again. As a result, oil will once again become a popular commodity.
In the short term, however, the collapse in oil prices does not bode well for oil-producing parts of the country. Even when businesses are reopened, oil workers may find that they do not have jobs to go back to.
Originally published on the resurgent
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