Oil storage tanks in California. Image source: Igor Terekhov © 123RF.com
In a remarkable turn of events, the price of WTI (West Texas Intermediate) crude oil tumbled to the unprecedented -$38 per barrel on Monday evening, which triggered a cascade of ripples in the energy market.
The turmoil was the result of many contributing factors spanning several weeks prior, such as the gradual closing downs of economies worldwide resulting in a marked drop in global demand, as well as the commencement of the oil price war nearly two months ago.
More recently, the announcement that the supply storage facilities worldwide were almost fully used up in addition to the WTI May futures contract expiring yesterday prompted additional volatility outbursts, as the nearing of the contract's settlement date saw a sizable rise in trading activity.
Ultimately, the crashing market is the result of uncurbed oil production that is consistent with the pre-pandemic global demand. However, the market currently finds itself in a position where global supply hastily outpaces the greatly subdued global demand, resulting in a massive disequilibrium in the market.
Part of the problem is the recently agreed-upon production cuts of OPEC+'s member states are going to start being implemented from early May onwards, and many market experts fear that these late cuts in production are not going to be substantial enough to breach the gap between supply and demand.
Investors fear that OPEC+'s decisions from early April may turn out to be too little, too late, which underpins the general fears that the current shock in the market might be here to stay.
In the wake of these tremors from late Monday evening, the price of WTI crude oil seesawed drastically between negative levels and just above the $0 threshold, on the aforementioned storage woes. The uncertainty in the energy market dragged the price of the other major benchmark – Brent crude oil – down as well.
UKOIL is currently trading around $17.50 per barrel, but what is more noteworthy is the fact that the crash prompted a divergence (seen on the chart below) between the two benchmarks and the way their prices advance compared to each other.
The price of UKOIL fell drastically as well; however, USOIL came crashing down much more noticeably, which underlines the different magnitudes of concerns that the swiftly depleting storage capacities represent for the two separate benchmarks.
For the time being, Brent oil seems to be demonstrating more resilience to the issue at hand compared to WTI, which could have lasting implications for the demand pressures between the two.
Crude Oil Comparison Chart. Image source: Trendsharks ©, created with TradingView.com
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