How to explain the historic fall in the price of oil?

The price of a barrel of American crude oil listed in New York for delivery in May collapsed Monday, finishing at -37.63 dollars, a fall amplified by the imminent expiration of a futures contract which pushed investors to shed it at all costs.

While it also fell, the same barrel for June delivery was $ 20.43. Such a monumental difference between these two futures contracts is explained by the bets of market players and speculators. When they buy one of these contracts, they agree to physically deliver it at a price and on a date determined in advance.

With West Texas Intermediate (WTI)’s May contract expiring on Tuesday, investors with barrels face a dilemma: sell them physically or store them for later delivery.

However, American oil reserves have increased enormously in recent weeks, making storage more difficult and more expensive.

In its latest weekly report, the United States Energy Information Agency (EIA) reported an increase of 19.2 million barrels of crude in a single week, the largest weekly increase since these statistics are published.

Rystad Energy cabinet estimated on Monday that the remaining storage capacity was 21 million barrels in Cushing, the city of Oklahoma where the barrels used as reference for WTI are stored.

Faced with this unprecedented situation, caused by a collapse in demand resulting from the cessation of transport and economic activity, due to the coronavirus (Covid-19) pandemic, the barrels for delivery next month have lost all their value and investors wishing to get rid of it have no other choice but to put their hand in the pocket to find a taker.

“Medium-sized players are paying ‘buyers’ to sell their oil volumes, the physical storage limit is about to be reached. And they are paying dearly,” said Louis Dickson of Rystad Energy.

For the specialist, this means that “well closures,” or even bankruptcies, could now be cheaper for some producers than paying tens of millions of dollars to get rid of what they produce.

” On the other hand, those who prefer or can afford to sell later by storing their black gold are betting that prices will have risen by then. They estimate in particular that world consumption of crude and refined products will restart at the same time as economic activity.

This situation results in a phenomenon of “Contango”, or deferral, where the price of a futures contract increases as the maturity is extended over time.

Thus, WTI’s contract for delivery in July ended at $ 26.28 and that for delivery in August at $ 28.51.

Another indicator that led some analysts not to overestimate the collapse of the WTI on Tuesday: a barrel of Brent from the North Sea, whose most active contract expires in June, ended at 25.57 dollars.

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How to explain the historic fall in the price of oil?
In this article a detailed explanation with facts about why the barrel price of crude oil has dropped in the international market during the Coronavirus pandemic.

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