Oil prices update: Prices plunged, and the oil industry is experiencing its worst crisis since the Great Depression, analysts say.
The demand for oil is shrinking at a fast pace. There are no travels, from airplane flights to shipping. US consumers, who use 10% of the world’s oil output in their vehicles, are currently staying at home.
The closely watched energy market in the world witnessed the value of the May oil futures contract dropped 300 percent. The price fell to $37.63 per barrel. The price movement was deemed unprecedented, but it is a sign that the oil industry will suffer more in the near future.
There is a basic lack of storage capacity in the world for crude, the analyst on CNBC say. The industry may now look into seriously curbing drilling. It may also find it hard to loosen the supply glut.
The May contract, which expires Tuesday, was the only one to trade in such erratic fashion, says CNBC. The June contract dropped by 15% and traded around $21.40 per barrel Monday afternoon.
Brent futures, the international benchmark, were trading at around $25.90 per barrel.
North American regional prices were affected by the lack of buyers for landlocked crude. Meanwhile, Louisiana light sweet crude was selling for almost over $5 a barrel, but crude in North Dakota was selling for negative $38.63 a barrel.
“The world has never come to a halt like it has in the past few weeks,” said Francisco Blanch, global head of commodities at Bank of America.
“60% of oil demand comes from transportation. Gasoline sales are down more than 50%. Flights around the world are down 80 or 90%. The collapse in consumption is mobility driven. That’s what makes this crisis different than the great Depression," he said.
Blanch pointed out that the coronavirus lockdowns make it hard for the typical market mechanism of consumers stepping in when prices fall work. “Producers are now being sent the harshest signal ever to react to the crisis,” said Blanch.
Dan Yergin, vice chairman of IHS Markit, stressed there were two other times when WTI oil futures fell amid lack of places to store it.
“You ran out of storage and prices fell. The difference was in 1986 and 1998, demand was going up. This is with this demand collapse. We’re on a planet we’ve never been on before.. This will end and demand will come back. A lot of it is up to public policy and a lot of it is up to the virus itself,” says Yergin.
Several months ago, the US was producing more oil than any other country, outshining both Russia and Saudi Arabia.
Due to the coronavirus outbreak in China, a steep drop in demand took place. "The oil industry didn’t stop pumping, and the world became more oversupplied with oil," Patti Domm writes on CNBC.
Oil production cuts
Moreover, Saudi Arabia and Russia were not able to broker a new deal on oil production cuts. With this, Saudi Arabia boosted its production in March.
“It’s one thing to make a deal. It’s another thing to find some place where you can still store oil,” said Yergin. “The deal was meant to buy time, but buy time over a period of time. The deal doesn’t magically solve what’s happening today.”
“This month is going to be a high tide of oil that’s going to swamp storage. Storage was once a logistical tool, and now it’s become a prized commodity,” Yergin added.
He explained that oil production reached its peak at 13.1 million barrels a day in February, and it could fall by 2.9 million barrels a day by the end of 2020.
Shale industry
Meanwhile, the shale industry in the US had become mature using ingenuity and technology to become the world's biggest producer in less than two decades.
However, it is not protected from the coronavirus pandemic.
“I think it’s more flexible on one hand. On the other you are also going to lose a lot of capabilities in a relatively short order. You’ll have to shut wells. They’ll have to fire people. I think what it depends on is the pace of demand recovery,” said Blanch.
