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Oil price still below zero as turmoil persists | |
(32 minutes later) | |
Negative oil prices on Monday were a "quirk", says one market expert. | Negative oil prices on Monday were a "quirk", says one market expert. |
The price of US oil - which slumped to minus $37 at one point - was produced by a trading deadline and is now back close to a positive figure. | The price of US oil - which slumped to minus $37 at one point - was produced by a trading deadline and is now back close to a positive figure. |
The UK oil price has been hit too, but the price of a barrel of Brent crude is now at about $23. | The UK oil price has been hit too, but the price of a barrel of Brent crude is now at about $23. |
"Yesterday's price action is best understood as a quirk or peculiarity of futures trading," said analyst James Trafford of Fidelity International. | "Yesterday's price action is best understood as a quirk or peculiarity of futures trading," said analyst James Trafford of Fidelity International. |
He reckons the unprecedented price movement confirms that near-term demand is very weak. | He reckons the unprecedented price movement confirms that near-term demand is very weak. |
"But it isn't cataclysmic," he said. "We don't see negative oil prices as a new normal, going forward." | "But it isn't cataclysmic," he said. "We don't see negative oil prices as a new normal, going forward." |
Oil prices have weakened sharply because of a combination of oversupply and a collapse in global demand due to the decline in economic activity cased by coronavirus lockdown measures. | Oil prices have weakened sharply because of a combination of oversupply and a collapse in global demand due to the decline in economic activity cased by coronavirus lockdown measures. |
What happened? | What happened? |
The price of oil that we see reported is actually the future price of oil. Futures are essentially contracts to deliver the physical commodity at a later date. | The price of oil that we see reported is actually the future price of oil. Futures are essentially contracts to deliver the physical commodity at a later date. |
So when we look at oil prices, we are actually seeing the market price for future months. | So when we look at oil prices, we are actually seeing the market price for future months. |
As the delivery date approaches, these contracts need to be rolled over to the subsequent period. | As the delivery date approaches, these contracts need to be rolled over to the subsequent period. |
The price of a barrel of West Texas Intermediate (WTI), the benchmark for US oil, fell into negative territory for the first time in history on Monday. | The price of a barrel of West Texas Intermediate (WTI), the benchmark for US oil, fell into negative territory for the first time in history on Monday. |
But that only related to the May contract, which was about to expire. | But that only related to the May contract, which was about to expire. |
Traders holding the contract were unable to find buyers, because no one with the ability to take delivery wanted it. | Traders holding the contract were unable to find buyers, because no one with the ability to take delivery wanted it. |
"Nobody wants to take delivery of oil next month because there's nowhere to store it, so the price dropped below zero," explained Rachel Winter, associate investment director at Killik & Co. | "Nobody wants to take delivery of oil next month because there's nowhere to store it, so the price dropped below zero," explained Rachel Winter, associate investment director at Killik & Co. |
Does that mean oil prices will fall further? | Does that mean oil prices will fall further? |
"Oil prices and associated equities in the sector will remain broadly weak over the near term," predicted James Trafford. | "Oil prices and associated equities in the sector will remain broadly weak over the near term," predicted James Trafford. |
He said the supply cuts recently agreed by the Opec group of oil-producing economies were not likely to be sufficient to balance the market any time soon. | He said the supply cuts recently agreed by the Opec group of oil-producing economies were not likely to be sufficient to balance the market any time soon. |
Opec is believed to be looking to cut oil output immediately, rather than waiting until next month, to ease the pressure on price. | Opec is believed to be looking to cut oil output immediately, rather than waiting until next month, to ease the pressure on price. |
"The kind of dislocation witnessed on Monday, however much some may downplay it, points to a fundamental problem in oil markets, namely a lack of storage capacity and demand," said Neil Wilson, senior market analyst at Markets.com. | "The kind of dislocation witnessed on Monday, however much some may downplay it, points to a fundamental problem in oil markets, namely a lack of storage capacity and demand," said Neil Wilson, senior market analyst at Markets.com. |
"But it also shows the market trying to do its job, forcing the price down enough to shut production." | "But it also shows the market trying to do its job, forcing the price down enough to shut production." |
Artur Baluszynski, head of research at Henderson Rowe, agreed that the effect was temporary, but warned of its implications. | Artur Baluszynski, head of research at Henderson Rowe, agreed that the effect was temporary, but warned of its implications. |
"While Monday's negative WTI futures price might have been a one-off glitch, it does confirm there is trouble ahead," he said. | "While Monday's negative WTI futures price might have been a one-off glitch, it does confirm there is trouble ahead," he said. |
"The Covid-19 crisis is destroying the global demand for energy and without a timeline on the end of the lockdown in the developed world, the market is suffering from chronic oversupply." | "The Covid-19 crisis is destroying the global demand for energy and without a timeline on the end of the lockdown in the developed world, the market is suffering from chronic oversupply." |