US oil prices turned negative for the first time on record on Monday as North America’s oil producers run out of space to store an unprecedented oversupply of crude left by the coronavirus crisis.
The price of US crude oil collapsed by more than 105% to -$2 per barrel in a matter of hours, forcing oil producers to pay buyers to take the glut of crude which they cannot store, as rising stockpiles of crude threaten to overwhelm oil storage facilities.
The crash in demand caused by the Covid-19 pandemic also forced Canada’s benchmark oil price to plunge into negative territory for the first time on Monday.
“The problem of the global supply-demand imbalance has started to really manifest itself in prices,” Bjornar Tonhaugen, head of oil at Rystad Energy said. “As production continues relatively unscathed, storages are filling up by the day. The world is using less and less oil and producers now feel how this translates.”
The Guardian reported over the weekend that a record 160m barrels of oil was being stored in “supergiant” oil tankers outside the world’s largest shipping ports, including the US Gulf, following the deepest fall in oil demand in 25 years because of the coronavirus pandemic.
The last time floating storage reached levels close to this was in 2009, when traders stored more than 100m barrels at sea before offloading stocks when the economy began to recover.
The price collapse in North American oil markets accelerated because it is the last day oil producers can trade barrels that are scheduled for delivery next month, when oil storage is expected to reach capacity.
The US price for oil delivered in June, which will become the default oil price from tomorrow, is also falling due to the economic gloom caused by the coronavirus, but has managed to remain above $20 a barrel.
In an unprecedented day of trading, the price for the May contracts wiped out all value, breaking every low for oil prices since 1946. The exchange where WTI futures trade said the contract would be allowed to price below zero. The extreme move showed just how oversupplied the U.S. oil market has become with industrial and economic activity grinding to a halt as governments around the globe extend shutdowns due to the swift spread of the coronavirus. An unprecedented output deal by OPEC and allied members a week ago to curb supply is proving too little too late in the face a one-third collapse in global demand.
Concerns over the economy, which directly affect oil demand, have been heightened by the growing standoff between the US president and state governors over whether the US can begin to lift restrictions on movement and businesses.
The heads of all the UN’s major agencies issued a graphic warning of the risk of coronavirus to the world’s most vulnerable countries after disclosing that international donors had pledged only around a quarter of the $2bn the UN requested for its emergency Covid-19 response in March.
Global oil prices are expected to begin recovering over the second half of the year as tight restrictions on travel to help curb the spread of the virus are lifted, raising demand for fuels and oil.
The world’s largest oil-producing nations have agreed an unprecedented deal to hold back between 10m to 20m barrels of oil a day from the global market from May, and many oil companies are likely to shut their wells as financial pressures mount.
Cailin Birch, global economist at the Economist Intelligence Unit, said: “US crude oil production has begun to fall in the last two weeks, and will continue to fall in the coming months as already heavily indebted shale firms scale back activity or are forced into bankruptcy or consolidation.”
Despite the historic production cuts, most analysts believe that oil prices will fail to reach the same price levels recorded at the beginning of the year before the outbreak. The global oil price in January reached highs of almost $69 a barrel in January before plummeting to less than $23 a barrel at the end of March.
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