The incursion of the price of a barrel of oil to north america in negative territory is due to market phenomena ad hoc, even if the pandemic of sars coronavirus and the war between the major producing countries augur of being persistently low.
At first glance, the figure defies common sense: in New York on Monday, a barrel of oil closed at -37,63 dollars. To be clear, the vendors were left to pay the buyers to sell their crude.
This phenomenon deserves however to be hulled.
WTI and Brent
Already, this historic collapse only concerns the variety known as “WTI” (West Texas Intermediate) that serves as reference on the american market while for Europe it is the variety “Brent” of the North sea, which determines the price. However, the Brent, even attacked, rest him for the moment around twenty dollars.
“A historic gap separates currently the two benchmark prices in oil markets,” says John Plassard of the investment company Mirabaud in a note Tuesday.
The reason comes primarily from the major u.s. production of oil, including shale, and the massive build-up of reserves in the terminal Cushing (Oklahoma) that extend beyond the face of the sharp downturn of the u.s. economy due to the outbreak of coronavirus.
In the clear: sellers of crude not only are more buyers, but are struggling even to store the surplus, hence the slipping from Monday.
Moreover, the price is the “negative” requires exploring the mechanisms are fairly technical in the oil market, most often unknown to the general public.
The oil market is what we call a market “term”: the prices are negotiated several weeks in advance, based on delivery deadlines fixed. Thus, less of the barrels in which physical exchange of contracts backed by the oil itself.
This mechanism, developed initially as an insurance against price movements, has become material for speculation.
In the beginning of the week, the contracts on the crude to be delivered in may expire, and the speculators are Monday forced to take possession of the oil they have already bought it. Cannot the store, they have preferred to compensate their “consideration” of the contract by paying to cancel the purchase, where the price is negative.
“As the WTI must be physically delivered and that it is expensive to get to tanks, the cost of storage may exceed the intrinsic value of the oil for the same month,” says Stephen Innes of Axi Trader.
“Unless co-ordinated action, the contract of June could lose all value, also, where the cries of the +shelter+ that are affecting the global market,” he says. Tuesday at 10.30 am GMT, this contract on the WTI to be delivered in June stood at around 16 dollars, and was itself in decline.
Behind these blips of short-term to appearance absurd, what are the basic movements that are rocking the oil market.
In particular, the war between producers. Russia and OPEC – and especially Saudi Arabia, the leader of the cartel – engaged for the past two months with more production, prices are down.
“At the meeting of the OPEC+ (beginning of march), the Russian minister of Energy Alexander Novak, has shattered the alliance between Moscow and Riyadh, which was chaired for three years to the delicate balance of the market. In a few hours, the oil is passed in a tense situation to a major crisis,” says John Plassard, to which was added the impact of the pandemic.
Saudi Arabia deciding to open up the valves of its production in a standoff with Moscow, the oil price went into a downward spiral. An agreement on a reduction of the production has occurred since was not able to stop it, the global economic recession, leading to a decline in consumption.
With grounded planes, factories idle, the cars in the garage because of the owners contained, the application is indeed depressed and it certainly is for a moment.