Oil prices plunged on Monday as traders got caught in a desperate race to offload contracts for just about any price they could get.
The price of a contract to deliver West Texas Intermediate crude oil next month plunged from $18 US to at one point as low as 16 cents per barrel as traders got caught in flurry to offload the contract before having to actually purchase the oil.
The oil price is determined through investments known as futures contracts, which are agreements to buy and sell a certain amount of oil, on a certain point in time in the future. The contract to deliver oil in May has been the most commonly traded contract of late, so it is currently considered to be the best proxy for the current oil price. Soon June will be.
Typically the contracts are bought and sold countless times before the oil is actually delivered to the final buyer. But the May contract is set to finalize on Tuesday, which means anyone who owns the contract after that has to actually acquire the oil somehow.
That’s easier said than done of late, as storage tanks in North America are almost full to the brim. The U.S. oil hub in Cushing, Okla. has 55 million barrels of oil in storage as of Friday, the highest level since 2018.
Monday’s startling oil price plunge is because traders are feverishly trying to offload the contract before they actually have to find a place to keep the oil starting next month.
“This may prove to be one of the worst deliveries in history,” said Phil Flynn, senior market analyst at Price Futures Group in Chicago. “Nobody wants or is in need of oil right now.”
Storage on land is filling up everywhere, so some producers have taken to storing their excess oil at sea, renting tankers to float aimlessly to store the crude until a higher price or buyer can be found. Rates for the biggest oil tankers have soared as producers scramble to secure space to keep the crude they don’t know what else to do with.
“Floating storage remains the only outlet for a mismatched production and consumption backdrop,” Evercore shipping analyst Jonathan Chappell said in a note to clients last week.
The going rate for the biggest oil tankers in the world hit $165,000 a day this weekend, Chappell calculates, but despite that up-front cost, “it is difficult to envision a scenario where floating storage is not economic and required over the coming months.”
June’s oil contract is also lower, but nowhere near as much. Late in the day on Monday, the June contract was changing hands at $22.27 a barrel, down almost $3 on the day.
While May’s plummet is excessive because of an unexpected imbalance, the intrinsic value of oil is indeed falling because there is too much supply and not enough demand for it.
The COVID-19 pandemic has walloped the global economy, as lockdowns, travel bans and factory shutdowns reduce the need for energy. Oil analyst Bjarne Schieldrop with SEB Research says global demand for oil has fallen by about 25 million barrels a day because of the pandemic.
The oil cartel known as OPEC tried to address that earlier this month by promising to pump 10 million fewer barrels of oil every day, but even that huge supply cut isn’t enough to offset the corresponding drop in demand.
“If your bathtub is about to overflow and you turn down the tap a little, it will still overflow,” Schieldrop said.
‘Negative prices are possible’
The type of oil that comes from Canada’s oilsands is known as Western Canadian Select and it, too, has seen its price plunge in the current economic climate.
WCS typically trades at a discount to WTI since it is harder to transport and refine, but the sell off in WTI’s price has pushed the price of WCS below zero — meaning Canadian oil companies are functionally having to pay to get rid of their product.
Raymond James analyst Jeremy McCrea told CBC News in an interview that he expects the price of WCS will continue to flirt with going below $0 for a little while yet.
“We did see WCS go negative this morning,” he said in an interview. “As we look forward into the next month it does seem to get a little bit better but with storage so full and getting more full by the day it doesn’t look too optimistic over the next couple months.”