How COVID-19 Managed To Send Oil Prices Into Negative Territory

Apr 22, 2020

Monday was a devastating day for crude oil prices as oil producers are stuck with oversupply due to the COVID-19 crisis. Crude oil stockpiles are overwhelming storage facilities which cause oil producers to buy back the barrels that could not be stored.

For the first time in history, markets found themselves in a negative a historic market stumble with the US crude oil price going from $18 a barrel to -$38 in just a few hours. Prices did rebound above zero on Tuesday to $1.10 a barrel.

On Wednesday, April 22nd, oil prices took a breather with U.S oil futures increased by more than 20%. West Texas Intermediate CLc1 increased by 18% coming to $13.62 a barrel, while Brent crude LCOcl rode to $19.37 a barrel.

This decline shocked market veterans and left them wondering and stunned. Negative oil prices mean that traders with a long position in oil will have to pay someone to take their oil. This due to the fact that the May oil contract expiration is approaching which would mean there will be no storage for the oil.

“Global markets are struggling mightily with a temporary but overwhelming demand drop due to the Coronavirus pandemic,” said AxiCorp’s global market’s strategist Stephen Innes, who warned that prices could plummet further.

The price of crude oil has been falling steadily as the novel coronavirus pandemic spread across the world. Its recent fall has been the biggest in over 25 years due to travel bans imposed which lead to the slash for the demand for jet fuel and gasoline. The turmoil across global markets raised fears that the global economy will be encountering its bleakest slump yet since the Great Depression. The volatility of the market prompted commodities exchange to raise margins on crude oil futures. To help the situation, the U.S Senate approved nearly $500 billion to support the situation.

US President Trump referred to the negative price as a “short-term problem” and that the US was loading its strategic reserves, saying, “If we could buy it for nothing, we’re gonna take everything we can get,”. Donald Trump added “We will never let the great U.S. Oil & Gas Industry down” and that he has instructed the energy and treasury secretaries to “make funds available so that these very important companies and jobs will be secured long into the future!”

Donald Trump took credit for executing a deal between the OPEC oil intergovernmental organization (Organization of the Petroleum Exporting Countries) and the leading global oil-producing nations to reduce the overflow of oil production into the market, which he was criticized for.

Crude oil as often been referred to as the world’s most important commodity or the black gold. The meltdown of crude oil prices indicates has simply confirmed the dreadful impact of the COVID-19 pandemic of even the strongest commodities in the market. But despite its tragic drop in prices, energy is still the second-best market performer. Technology saw the greatest decline of all with the financial sector following behind as global banks declined.

Global governments continue on working to flatten the curve of COVID-19 cases, but lockdowns have resulted in the depression of markets and the closing of many businesses.

Portfolio manager at CIBC Asset Management, Craig Jerusalim, said “Bankruptcies are going to be elevated, consumers are not going to be able to pay their credit cards to the same extent as they were, which means provisions for credit losses are going to go up and overall profitability in many financials is going to deteriorate for some time,”.

The S&P/TSX composite index closed down 3.1% at 13,940.06, while the Dow Jones industrial average was down 631.56 points at 23,018.88. The Nasdaq composite was down 297.50 points at 8,263.23. Oil sensitive currencies such as the Canadian dollar traded for 70.41 USD cents, compared to its normal average of 70.99 USD cents. Yet despite the painful decline in practically every industry across the world, some positive news was born at the end of April – the harsh lockdowns are helping and the growth of infections has declined.

Countries are beginning to plan diminishing strict lockdown regulations and contemplating on how to restart their national economies. There is a tough road ahead, but it seems like there is finally light at the end of the tunnel.