First, let’s start with the type of oil that went negative yesterday. This is important because it is the first time in history that West Texas Intermediate (WTI) turned negative. Effectively, oil producers are paying storage companies or refineries to take their oil.
So, why? First, US crude – (WTI), has historically not left the US, it serves the US economy. This is a different type of oil than Brent crude. WTI oil is effectively landlocked, whereas Brent Crude oil is a seaborne crude oil that can move anywhere in the world via shipping. So, WTI reflects the US market and not the global price.
There is a difference between the two and WTI has historically always been priced lower than Brent crude. Today, we have a large divergence. In short, there are no more places for WTI to go (storage/refineries) and the US oil business has effectively ground to halt, because the shut down of the economy has resulted in minimal demand for the commodity. It is worth noting that this will have a knock-on impact on the oil producing supply chain, e.g. drilling etc. Canadian oil sand supply has suffered a similar impact, given its over-reliance on supplying the US market.
There is another important element here - the contracts. Crude is traded in front, first and second month delivery. Yesterday was the end of the front month contract – end of trading for oil to be delivered in the month of May. The final day the price went negative, however, June delivery of WTI remains at $12-13 a barrel. What this means is, there is no demand for the immediate supply of US oil.
Brent started the year at $65 and is currently trading at $25, so there will be keen interest in what happens next. Fundamentals of US market are impacting the global market. Demand in April is down 30 million barrels a day – compare this to the beginning of the year with the total consumption of oil at 100 million barrels a day. Production cuts will have little impact. For oil to stabilize and recovery, demand must return