$4 a barrel oil cheaper than a cup of coffee
Oil prices have plunged to their lowest level in more than two decades, but consumers shouldn’t expect to see the benefits in cheaper fuel at the pumps.
West Texas Intermediate crude oil nosedived on Monday as traders on commodity markets dashed to exit contracts, sending the price per barrel through the $12, $10, $5 markers and ultimately below $4 in rapid order.
The background to the price collapse is a fear that America’s oil storage capacity will fill up within weeks, which in turn would force an expensive production stop.
Financial markets analysts Paul Sommerville said the immediate trigger for the price fall is a technical feature of the oil market.
Oil is traded through futures contracts with different expiry dates. The May contract is due to expire today, meaning the crude oil gets delivered to the holder of the contract. With little current demand for fuel and storage costs rising nobody wants to take delivery of oil – sparking the sell-off.
Oil prices were under pressure regardless, but contracts for delivery in June and beyond did not fall as hard.
Even so, the wider decline in oil prices – even as producers from Saudi Arabia to Russia try to hold up demand by limiting production – reflects lack of demand.
Lockdowns across the globe means oil-hungry industries from transport to energy and petrochemicals are in stasis, seeing demand for their own products collapse or are suffering other market disruptions.
West Texas Intermediate is the key US benchmark crude oil product, so a proxy for global prices.
Irish consumers have seen some cuts in fuel prices at forecourts this year – prices are down around 12pc but that’s relatively little compared to wholesale price declines. That reflects to a significant extent the tax share of the pump price – for fuel tax is levied per litre rather than as a percentage of the price.
Analysts from Goldman Sachs warned earlier this month that the coronavirus crisis was “extremely negative for oil prices and is sending landlocked crude prices into negative territory”.
That will hurt the oil industries in North America and Russia most, due to the geology and location of supplies there, the Wall Street bank said. America’s fracking industry is widely forecast to suffer scores of bankruptcies this year as producers lose money when the oil price is low.
Jeff Currie, Goldman’s global head of commodities research, said the pandemic would “permanently alter the energy industry and its geopolitics, restrict demand as economic activity normalises and shift the debate around climate fuel prices this year, though nothing change”.
However, he predicted prices over the summer reflect the fact that traders see storage capacity reaching its limits and are concerned about a longer-term reduction in oil demand.
“Cuts in production from Opec+ [the cartel of oil-producing countries] will help with rebalancing eventually but do not start yet. Russia is actually still supplying more oil to the market in the near term, and US shale volumes are holding up despite the worst rig count there since 2015.”
Additional reporting Bloomberg