Undestanding First-Ever Negative oil price
By Ahmed Adamu, PhD
As I write this article, the famous American crude oil called West Texas Intermediate (WTI) is sold at -$13 per barrel, which means, suppliers of oil have to give $13 to whoever is willing to take one of their barrels of oil produced. This means, the oil is free today, and you will get an incentive for taking the oil. The suppliers are desperate to let go of the oil they produce to avoid storage costs.
The reason behind this unprecedented decline in the price of that oil is just simply a storage crisis. The buyers of WTI oil are required to take physical delivery of their oil at a location called Cushing in Oklahoma, unfortunately, this location has saturated its storage capacity, and buyers don’t want to take delivery of oil without a place to store it before getting a final buyer. And tomorrow, Tuesday is the expiration of the May Futures contracts.
A futures contract is an agreement where buyers and sellers agree to deliver oil at a futuristic price. Buyers and sellers establish a price that oil will trade at not today, but on some coming date at a particular speculated price. So, the futures market for the oil that’s supposed to be delivered in May is closing tomorrow. So buyers don’t want to take delivery of May supplies because there is no space to store them. That’s why they are ditching their contracts, and no one is willing to keep their contract, hence the negative price.
However, this is only affecting American oil, not Nigerian oil, Nigerian oil as we speak now is sold at $22 per barrel, it is even high by 4% today. Other oils like that of global benchmark oil, the Brent, are not facing that pressure too. It is sold at $26 per barrel.
Most people would have expected an increase in oil price, but the oil price is still not above the Nigerian adjusted benchmark of $30 per barrel. This is because the world is already having a lot of oil supplied, more than it needs and the demand is nowhere to be found due to the coronavirus lockdown.
Despite the recent OPEC’s commitment to reduce world oil production by 10%, the oil price is dwindling, this is because we already have excess inventory, and we have to allow time for the market to clear before this reduction takes effects. In the normal demand period, this takes one to two months, but in this abnormal period, the market response may take up to four months, things being the same. So, the only immediate hope is for demand to surge when countries agree to open their economies in the presence of the deadly virus.
Dr. Ahmed Adamu
Petroleum Economist, Nile University, Abuja.
[email protected]
