The US crude oil started trading at a record low of minus $37 on the 20th of April 2020 one day before expiry of the May contract. For the first time in history the WTI Oil was trading at a value below Zero. Does this mean we should start expecting free petrol for our cars? Sadly that might not be the case just yet.
The May contract of oil was due to expire on 21st of April 2020. When a futures contract expires, traders must decide whether to take delivery of the oil or roll their positions into another futures contract for a later month. So the May contract drop is not an accurate reflection of the price rather it is indicative of lack of demand and storage capacity.
The June contract for instance, the one which actually matters after 21-2-20 is trading at around $21 a barrel at the time this piece is being written.
Investors bailed out of the May contract because of lack of demand for the actual oil. The WTI oil storage facilities are mostly landlocked. Now traders have hired vessels just to anchor them and fill them with the excess oil. A record 160 million barrels is sitting in tankers around the world.
But this will not exactly translate into lower oil prices for Pakistan mainly because we do not trade in WTI rather we use Brent crude oil.
Brent crude futures, the international benchmark for oil markets, plunged 28% to $18.31 a barrel, their lowest level since 2002. The decline came a day after the price of West Texas Intermediate, the U.S. crude benchmark, dropped below zero for the first time in history.
The prices of Brent have also dropped due to lack of demand but it is not currently facing any storage issues as most of the Brent oil is stored at facilities built at sea.
According to the Frobes website “Brent crude is priced in the middle of the North Sea, where tanker storage is ample and accessible, while WTI oil storage in the U.S. is limited as well as landlocked, making transportation relatively more difficult. As a result, Brent is more removed from the coronavirus demand shock and WTI prices are much more sensitive to that shock; as demand drops, storage fills up and prices in the United States respond more quickly.”
