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April 28, 2020

FBS, What happened to Oil industry and How the price went below zero?

Oil industry collapse amid Coronavirus pandemic. The article explains what, how and why it happened.

Oil-Industry-Amid-the-Coronavirus Oil-Industry-Amid-the-Coronavirus

How oil market price could go below zero?

Oil Industry Amid the Coronavirus

Last week, the US oil market witnessed one of its darkest days as futures contracts dropped to negative territories and reached $-37 a barrel for the first time in history.

Coronavirus crisis has stopped life all around the world and that caused the collapse of the global oil demand.

There is no room to store the unwanted barrels of oil.

Traders didn’t know what to do with May contracts for WTI, so they were forced to sell the oil and pay $37 for buyers to take it.

Do June oil futures face the same destiny? After the historic crash, June contracts fell to $9.50, but rebounded in the following days to around $17 on global output cuts.

This rebound, however, might be temporary if the oil market doesn’t get its balance back quickly.

To avoid another oil crash, these contracts need to be delivered on time before they expire but it all depends on containing the coronavirus first.

What happened to the Oil Industry

The oil market witnessed one of its darkest moments last week after the madness that has struck the world- Coronavirus Pandemic.

So what’s going on? Will oil bottom this year? Could markets benefit from this cheap oil?

Life has stopped after the spread of Coronavirus; factories are dark, and production is out of service.

Even planes are on the ground, with no flights or traveling or transporting, and no one is using oil or gasoline currently.

That’s simply how the global demand on oil collapsed.

The oil production didn’t stop at the same pace as demand dropped and the result was:

  1. Global glut, leaving the market flooded with cheap oil.
  2. No place to store the unneeded barrels of oil, because storages are close to their maximum capacity.
  3. Oil prices collapsed, and futures reached negative levels to $-40, for the first time in history.

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What are May Future Contracts that caused this historic collapse?

These are contracts that traders bought in the past months, in the hope that the coronavirus crisis will end soon, and the demand on oil will rise again.

However, they couldn’t sell those contracts at a higher price before its expires date on April 20.

They also had no place to store the physical oil, so they were forced to sell oil futures at any price.

Rather, they paid the buyers about $40 above each barrel to get rid of it, because the cost of storing oil would be higher.

The US crude oil prices dropped.

Prices for WTI Crude May futures reached minus $37, meaning that you buy a barrel of oil without money and receive a $37 too.

How Coronavirus has impacted the financial economy?

Will Oil bottom this year?

After the historical decline, June contracts saw a sharp drop in their prices, reaching $9.48, but closed slightly higher on Friday at $14.24.

Now, WTI Crude (Jun20) is trading around $12.

But this recovery wont last long because it was a result of cutting production from some oil producers.

Prices will fall again if the contracts aren’t delivered on time.

Therefore, it appears that the June contracts will face the same fate if the coronavirus havoc doesn’t end in May.

We’ll remain in the same vicious circle; no production, no consumption, no work, and no demand on oil.

The result is factory closures, more job losses, increased unemployment, the collapse of oil and stock prices, and unprecedented losses.

The longer the lockdown continues, the more we suffer in recession chaos.

How Coronavirus (COVID-19) affects the Global Economy?

Why don’t we stop oil production?

Oil companies cut production in two ways.

First, they slash their spending plans for drilling new wells.

Second, they start turning off the existing active wells through an expensive and painful process known as “shut-ins”.

We may hear in the coming period about the bankruptcy of the oil companies because cutting oil output isn’t as easy as shutting the water faucet. Why?

Oil companies cut production in two ways. First, they slash their spending plans for drilling new wells.

Second, they start turning off the existing active wells through an expensive and painful process known as “shut-ins”.

We may hear in the coming period about the bankruptcy of the oil companies because cutting oil output isn’t as easy as shutting the water faucet. Why?

However, the current situation due to coronavirus is new to the world.

We haven’t witnessed anything like that before, so we don’t know when life will return to normal again and whether oil demand will return as before or not.

What will happen if a more disastrous second wave of COVID-19 came, forcing us to close countries again? Demand will collapse further, and take oil prices with it to unprecedented levels.

The biggest risk crude oil is facing right now is a false sign to reopen economies.

For example, if oil prices settled around $20, 533 US oil exploration and production companies will file for bankruptcy by the end of 2021, according to Rystad Energy.

The number of active drilling rigs has dropped to less than 440, according to data from Baker Hughes; it was at 825 a year ago.

What’s the best strategy to trade through Corona Virus Market?

Forecasts – Will oil prices reach minus $100

If the lockdowns continue, and oil tanks are full to their maximum capacity, which is expected to happen in late May or early June, we may see oil prices drop to minus $100 per barrel in May.

The chaos in the US oil market will reach the global oil market, and we’ll witness the peak of storage everywhere.

There are 50 million barrels of crude are going into storage every week, enough to fuel Germany, France, Italy, Spain, and the U.K. combined.

With the limited amount of storage remaining, production will soon need to decline to balance the market, paving the way for higher prices to rise once demand gradually recovers.

The oil could trade from $50 to $60 next year, and maybe even higher.

Goldman Sachs had previously forecast that the price of oil would climb “far above” $55 in 2021.

More than 3.6 billion people now live in quarantine, the global economy is struggling, and demand for oil in 2020 is expected to drop by about 10 million barrels per day due to the Coronavirus.

But this situation won’t last forever, and the world will thirst for oil again, and then we will witness a crazy rise in demand while the supply will decrease.

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