This is quite simply an unprecedented situation that the oil market is facing today, with a barrel of WTI that yesterday fell below the zero dollar mark at -37.63 dollars. Historically, the lowest level ever reached by crude oil was $10 in 1983. But what does this negative quotation mean? What are the causes and consequences? Explanations and advice!
First of all, remember that the price we are talking about here is the price of a barrel of WTI crude oil, which is the price of transactions between producers and refiners. Given that refiners now have large inventories and that demand is currently collapsing due to the Covid-19 pandemic, the drop in price is mechanical while production continues to supply the market in excess.
However, demand is currently close to zero on the wholesale market. The barrel price has gone into negative territory, which means that producers are willing to pay for wholesalers to store their oil in their reserves.
Such a significant drop in the price of crude oil has not been observed since the 1929 crisis and this is the first time in its history that black gold has posted a negative price. Indeed, usually, the drop in oil demand linked to an economic crisis takes place over the longer term. With the coronavirus crisis, world economies were very quickly paralysed, leading to a drastic and almost instantaneous drop in demand.
Of course, this negative quotation concerns the barrels ready for shipment and the price of the barrels of WTI to be delivered in June in the USA remains for the moment above 20 dollars. Indeed, the market seems to anticipate a recovery in demand in the coming months and as deconfinement takes place in the major economies.
As far as the European economy is concerned, the reference oil remains North Sea Brent, which currently remains above $25. Indeed, we know that demand for American crude is often less strong than for Brent and, moreover, demand from Europe is currently declining much less than that observed in the United States.
However, the collapse of the U.S. market will not be without consequences for the rest of the world as U.S. producers will be flooding world markets to sell off their inventories, leading to lower prices.
We can therefore also expect a sharp decline in the price of Brent oil in the coming weeks, although this fall will probably be less spectacular than that of the American barrel. It remains to be seen how effective deconfinement will be in the economic recovery of these major economies.