Crude oil futures are crashing to kick off the trading week as supply and demand strangle the energy sector. In a once-in-a-lifetime turn of events, the price of US oil’s may contract cratered triple digits fell below $0 amid collapsing global demand. Are June’s contracts headed for the same fate?
May West Texas Intermediate (WTI) crude oil futures plummeted $35.23, or 192.52%, to -$16.98 per barrel at 19:01 GMT on the New York Mercantile Exchange. This contract expires on Tuesday. June WTI crude futures have also tumbled $4.07, or 16.26%, to $20.96 per barrel. Year-to-date, US crude prices are down 65%.
Brent, the international benchmark for oil prices, is adding to its 2020 woes, too. June Brent crude futures fell $2.60, or 9.26%, to $25.48 a barrel on London’s ICE Futures exchange. Brent prices have plunged 20% in the last week, adding to their YTD losses of 61%.
Investors are witnessing history. US crude’s one-day drop is the first time in history the contract has plunged into subzero territory. The last time oil suffered this big of a drop was back in 1983.
What happened? There is a global supply glut as key energy producers flooded the international marketplace with oil. In the US, hydraulic fracturing (fracking) pushed daily output levels to above 13 million barrels per day (bpd). In the Middle East, the Organization of the Petroleum Exporting Countries (OPEC) previous and current agreements to slash production were not enough. When you factor in the estimated decline of nine million barrels per day in demand, prices are going to crater.
There is so much oil in the world that there is nowhere to put it. Floating storage levels – oil that is on a tanker in the sea without a booked destination – are nearing capacity. Global storage volumes are exceeding 70% capacity. Some producers are willing to pay the government to rent federal land space to store the oil.
Analysts have been sounding the alarm for the last two months about oil prices sliding to the low teens. Some have gone as far as calling for $5 per barrel. But could crude slump to zero? Goldman Sachs oil analysts do not think the leading benchmarks will go that low, though they did not dismiss certain pockets from experiencing subzero prices, such as Canada’s oil sands development.
Waterborne crudes like Brent will be far more insulated, staying near cash costs of $20/bbl with temporary spikes below. Shut-ins will not be based upon where wells sit on the cost curve but rather on logistics and access. High-cost waterborne crude oil that can reach a ship (storage we have historically never run out of) are better positioned than landlocked pipeline crude oil sitting behind thousands of miles of pipe, like the crude oils in the US, Russia and Canada.
In other energy markets, June natural gas futures soared $0.175, or 9.98%, to $1.928 per million British thermal units (btu). June gasoline futures fell $0.035, or 4.92%, to $0.6757 a gallon. June heating oil futures declined $0.0637, or 6.5%, to $0.9163 per gallon.