US oil prices crash to negative territory amid devastating glut

US crude oil prices dropped by almost 300 per cent to turn negative for the first time as plunging demand pushed storage facilities to their limits. May delivery for the US benchmark crude, West Texas Intermediate, sank to a new low of minus $37.63 a barrel by the close of the oil market on Monday, a staggering level that essentially means producers would be paying buyers to take oil off their hands. Oil set to be delivered in May was hit hardest since that futures contract expires on Tuesday. The June contract also fell, though by a far smaller margin of 18%.

Quarantine lockdowns across the world have slashed demand to almost zero for some of the world’s industries like passenger airline transportation, car and aircraft production, travel have ground to a halt. Even a historic production cut agreement between OPEC+ and its allies did not provide the momentum required to stanch the surplus as producing countries continue to pump oil ahead of the May 1 implementation.

Besides, tanks, ships, and pipelines are almost filled to the top in most oil producing countries; some countries do not have extra capacities for oil to be stored. The crash in the oil market is the latest sector of the economy to sustain seriously — though temporary — damage from the coronavirus pandemic. Ahead of the OPEC deal, prices had plunged to all time record low levels within a negative territory on May delivery contracts. WTI spot prices tumbled to $6 per barrel early morning on Tuesday and are struggling to recover amid a paralysis of the global economy.

The energy economy is forcing US companies to make tough decisions. They are struggling to stay afloat as falling prices make them less competitive and they are laying off workers. The cratering of the oil market prompted more selling on Wall Street where all three indices were decisively negative in the final hour of trading yesterday.

Most European markets ended the day higher as governments start to consider how and when to ease the lockdowns that have crippled the global economy. Italy, Spain, France and Britain reported drops in daily death tolls and slowing infection rates, while Germany began allowing some shops to reopen and Norway restarted nurseries.

It will take a recovery in demand to turn the market round and that will depend on how the health crisis unfolds. There will be further supply cuts as private sector producers respond to the low prices, but it's hard to see that being on a sufficient scale to have a fundamental impact on the market.