Explainer: What Happened to Oil Prices and What Does it Mean for Russia? Oil prices in the U.S. went negative for the first time in history. Should Russia be worried?
By Jake Cordell
Updated: April 21, 2020
Russia, Saudi Arabia and others recently agreed a deal to cut oil production by 9.7 million barrels a day. Negative oil prices in the U.S. are the latest sign it will not be enough.Michael Nagle / Xinhua / TASS
What happened?
The headline price for a barrel of West Texas Intermediate (WTI) oil fell into negative territory for the first time in history Monday evening. Prices set a new record low of minus $40.32 during U.S. trading hours. That means sellers were paying buyers to take oil off their hands.
Why did it happen?
The price refers to futures contracts on WTI oil — the American benchmark — due for delivery in May. A combination of three factors pushed the headline price deep into the red, market watchers say.
First, global demand for oil has tanked since the start of the coronavirus crisis, while rigs are still pumping out more than the world needs. Second, Monday was the final day when traders, buyers and sellers could get their orders in for oil which would be delivered in May, or sell oil they had bought weeks and months ago and now realize they don’t need. Third, storage facilities for unused oil are filling up fast.
1. Demand destruction. Analysts estimate that global demand for oil is down by as much as 30 million barrels per day (bpd) from its usual levels of around 100 million bpd as a result of the unprecedented lockdowns and mobility restrictions which countries around the world have introduced in response to the coronavirus crisis.
At the same time, oil producers have not cut back their production by levels to match. Russia, Saudi Arabia and other major producers struck a deal to take 9.7 million bpd out of the market starting May, while the Organization of Petroleum Exporting Countries (OPEC) claims cuts from other producers such as the U.S. mean around 20 million bpd could be taken out of the market. But analysts at Energy Aspects say that is an optimistically high estimate, relying on double counting. Either way, simple supply-and-demand dynamics dictate that if there is more oil being produced and less energy being used, prices will fall.
2. Futures contracts. The headline price for oil is usually quoted as the going rate on the next-available futures contract. That means the amount for a barrel of oil to be delivered at the start of the next contract period, which runs monthly. Monday was the final day of market trading for WTI to be delivered in May. For buyers who had locked into contracts weeks and months ago, it was the last chance to ditch unwanted oil before being forced to take physical delivery of the oil in Cushing, Oklahoma — an oil hub in the U.S. where all WTI oil is physically delivered to buyers, before they they pipe it or store it somewhere else.
3. Storage bottleneck. With supply outrunning demand, attention has rapidly turned to storage capacity — where to put unwanted oil. Storage facilities at Cushing have been rapidly filled over the past few weeks. Rystad Energy estimates there are only 21 million barrels of spare storage left — enough to cover just two days of U.S. oil production. That means buyers have few options to physically take delivery of the oil they bought if they don’t plan to immediately use it.
This potent cocktail pushed market players into a desperate frenzy Monday as they scrambled for storage space or tried to ditch contracts to avoid being stuck having to take delivery of unwanted oil in just a few days.
What about Russia?
Monday’s historic price crash was largely an American story. It affected just one kind of crude oil — WTI, with the technical aspects of storage limitations, oil being physically delivered to Cushing, and markets trading on the contract expiry date combining to send prices into a historic slide.
For Russia, the frantic scenes of traders paying buyers $40 a barrel to take American oil off their hands mean little on their own. Russian producers sell a different kind of oil — Urals — with the price determined by the benchmark Brent crude oil, not WTI.
However, the spillovers have rippled through the rest of the market Tuesday, with Brent and Urals coming under pressure. The sign of prices going negative in the U.S. triggered a fresh assessment of the extent of the crash in demand for global energy. Brent crude is not trading in negative territory, but crucial June futures contracts for Brent plunged by more than 20% Tuesday to below $20 a barrel.
The immediate effect has been pressure on the ruble, which lost more than 3% against the U.S. dollar and is trading at 77 — its lowest level in three weeks.
Poster Comment:
Russian crude is a different ball of wax.