Global oil prices could 'chase' US crude below $0 if demand for fuel doesn't pick up, analysts fear
- Brent crude slid below $20 a barrel to $16.59 on Tuesday morning, after US oil caused immense confusion around the world as to how and why prices could go negative.
- "If global storage worsens more quickly, Brent could chase WTI down to the bottom", Citi analysts told the Financial Times.
- In theory, a $0 oil price would imply that producers discontinue production but in practicality, it is more economic to pay someone to take the crude instead of shutting the well, a crude oil market analyst said.
- Analysts say crude must price in a manner to stop barrels flowing into the hub and production shut-ins need to happen to enable this.
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Brent crude oil has continued to slide even after OPEC and its allies agreed to record-level production cuts intended to backstop oil prices.
Brent crude, the global benchmark price for oil, dropped below $20 per barrel Tuesday as the oil market's woes spread outside the US.
On Tuesday morning, West Texas Intermediate (WTI) crude was at around $-4 per barrel, well above the bottom of $-40 per barrel on Monday, but still floating in unprecedented territory.
While most of the focus in recent days has been on US crude, there are fears that Brent could follow WTI down below zero soon.
"If global storage worsens more quickly, Brent could chase WTI down to the bottom," Citi analysts told the Financial Times. They added that WTI would remain volatile thanks to the continued difficulty of storage for US oil.
Among non-market watchers, oil's drop below zero prompted immense confusion around the world as to how and why prices could go negative.
In theory, an oil price at below zero would imply that producers discontinue production but in reality, it is more economical to pay someone to take the crude instead of shutting the well that produces the oil, Jon Sudduth, a crude oil market analyst at Energy Aspects told Markets Insider.
Cushing, Oklahama is the pricing point for WTI oil prices — the most highly traded futures contract in the world.
As the expiry date of a contract approaches and owing to physical containment measures at Cushing, liquidity dries up for "long positions," Sudduth said, referring to a halt in bullish expectations that the contract would increase in value.
Key benchmarks may well lag even when demand recovers
According to Energy Aspect's forecast, Cushing is set to "hit tank tops" by early May, which would render the hub physically contained — meaning that no more oil can be stored there as it would run out of storage space.
Ultimately, Sudduth said, crude must price in a manner to stop barrels flowing into the hub, and in this case, production shut-ins need to happen to avoid testing storage capacity limits.
"Unless stocks draw during June, similar price action during expiry may become the norm for the next few months," he said, suggesting that another price crash could come within a month.
Analysts at Energy Aspects said regardless of whether Cushing fills up, or reaches its storage limit, around one billion barrels of oil must be de-stocked — moved out to be used — before prices can truly recover.
Even in a best-case scenario of a demand recovery, the analysts said, key benchmarks for oil may well lag not only because the recent OPEC+ cuts are biased towards specific types of oil, but because lockdowns have weighed far more on demand for jet fuel and gasoline than less refined products, which are generally employed in industrial uses.
Oil refiners will struggle with domestic demand for jet fuel or gasoline as the recovery in jet fuel will be "extremely gradual." Jet fuel demand may not go back to pre Covid-19 levels for years, the analysts said, as the number of flights being taken only slowly recovers.
Carl Larry, performance director at Refinitiv, thinks there may not be a clear company or market participant that will benefit from the current oil trade.
"Several of the bigger oil and gas companies can take this trade and accept it as a losing hedge or one that outweighed the physical position," he said.
Those results, Larry believes, may not become public until trading income is seen on annual reports. "Those in the industry will not be quick to tattle on others in the industry at risk of losing trading partners."
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