The price of US oil has turned negative for the first time in history. This means that buyers are being paid by oil producers to offload their commodities. The action is being triggered by the fears that the producers may run out of storage capacity next month.
The demand for oil has gone down drastically all over the world in the wake of the COVID-19 lockdowns. The oil companies are renting tankers for storing the surplus supply.
The price of a barrel of West Texas Intermediate (benchmark of US oil) came down to minus $37.63/barrel.
According to a report by BBC, oil is traded according to its future price and the expiry date for May future contracts was April 21. In order to avoid huge storage costs, traders wanted to offload the holdings.
Oil economist and independent consultant Phil Verleger said “The people who are long are desperate to get out. If you don’t have the storage you have to get out.”
Production needs to be cut
The oil producers have decided to reduce oil production by 9.7 million BPD. However, these cuts will not happen before May.
Notably, deliveries are being ramped up by Saudi Arabia, including shipments to the US.
Roughly, the per day consumption of oil across the world is 100 million barrels. The oil supply is generally in line with consumption. However, in these times, there has been a 30% reduction in global oil consumption.
In a rare situation, currently, the world has more crude oil than it can consume. The storage capacity is filling up quickly. The demand parameters are unlikely to change until there is any improvement in the current situation. For the markets to turn around, the demand needs to rebound.