Oil price crashes into negative territory for the first time in history amid pandemic
Oil prices fell off sharply to new lows mid Monday after the price for a barrel of West Texas Intermediate (WTI) crude, the benchmark used for pricing, fell to negative $36.20 a barrelThe coronavirus pandemic has severely reduced oil demand around the world due to excess decline in airline, car, shipping and trucking traffic as well as manufacturing production for the commodity.
The WTI market has entered contango, meaning spot prices are lower than prices for future delivery of crude oil — a highly unusual occurrence.
When oil prices are negative, it means traders holding oil futures are paying buyers to take it off their hands or risk having to take physical delivery of the oil, which most are incapable of doing. Oil is still a valuable commodity, but the selloff followed a huge oversupply in the market after major producers refused to lower their output creating fewer places to store the liquid.
WTI crude for May delivery has traded at large discounts to longer-dated contracts. That dynamic is playing out amid worry that a key storage hub in Cushing, Oklahoma, is nearing capacity, according to Bloomberg.
“Basically, bears are out for blood,” said Naeem Aslam, the chief market analyst at AvaTrade. “The steep fall in the price is because of the lack of sufficient demand and lack
of storage place given the fact that the production cut has failed to address the supply glut.”
He added: “The bottom line is that there is no doubt that oil prices are way oversold at the current level, but given the circumstances, it is likely that the price may continue to fall further because the rig count hasn’t touched its bottom yet.”
Oil prices and rig counts are strongly correlated. Higher oil prices make production more profitable, encouraging more producers to operate.