An unprecedented meltdown happened yesterday the 20th of April 2020 as oil prices crashed through zero, closing out the day at -$37 per barrel according to oilprice.com. Many factors contribute to price volatility and for this circumstance it was the May West Texas Intermediate (WTI) contract.
Today, Tuesday 21st April 2020, the May WTI contract is expiring and every trader is abandoning it to take up the June WTI contract thus losing some relevance. The new June WTI contract is now of a watch and as at yesterday, it was trading at $20 per barrel, according to oilprice.com.
As future contracts expire, they tend to converge with realities of the physical market. Nick Cunningham explains that prices went down to negative because the physical market in Oklahoma and Texas is so overwhelmed. The effects of the price war on supply side are colliding against the depth of demand destruction at the same time. The result was that nobody wanted to be left with the physical delivery of WTI for May, with storage points dwindling in some places thus selling contracts at crazy discounts. The rush is like a fall from a frying pan to fire, if June WTI contract is trading at $20. This isn’t a price at which most oil companies can continue operations for any lengthy period of time especially in the United States of America.
2020, 1st quarter could be a certain period unlike the 2nd quarter which is likely to be the most uncertain and disruptive quarter that the industry has ever seen. The markets continue to be at the mercy of the pandemic as several billion people are living under some version of a lockdown. Hopefully the end of the COVID-19 pandemic will increase the level of demand as normalcy resumes. The Organization of Petroleum Exporting Countries (OPEC) had set its production cut with effect from May 1st 2020; this could also help to reduce on the supply glut currently being experienced on the market.
Oil price fluctuations have happened since time immemorial and supply gluts have continued to happen despite plummets in demand across the globe especially due to the ongoing geopolitics between nations. The oil and gas industry prices have always recovered and our hope as a continent is that this is just a phase and this is something I would love to witness and continue to report about as an energy scholar.
By Johndab Muthegheki (Energy Scholar) johndabmut@gmail.com
The writer is a student at the Institute of Petroleum Studies – Kampala