The price of a barrel of Brent Crude – the UK benchmark for oil – has dropped below $ 20, its lowest level since 2002.
The drop of almost 20% follows negative prices recorded for a barrel of West Texas Intermediate (WTI), the benchmark for American oil.
Negative oil prices on Monday were a “quirk,” says a market expert.
The price of American oil – which dropped to minus $ 37 a barrel at one point – was produced on the trade deadline and has now returned to a positive figure.
“Yesterday’s price action is best understood as an oddity or a feature of futures trading,” said analyst James Trafford of Fidelity International.
He believes that the unprecedented price movement confirms that short-term demand is very weak.
“But it is not cataclysmic,” he said. “We do not see negative oil prices as a new normal in the future. “
Oil prices fell sharply due to a combination of oversupply and a collapse in global demand due to the downturn in economic activity caused by coronavirus blocking measures.
The price of oil that we see reported is actually the future price of oil. Futures contracts are essentially contracts for the delivery of physical commodity at a later date.
So when we look at oil prices, we actually see the market price for the next few months.
As the delivery date approaches, these contracts must be carried over to the next period.
The price of a barrel of West Texas Intermediate (WTI), the benchmark for American oil, fell into negative territory for the first time in history on Monday.
But that only concerned the May contract, which was about to expire.
Merchants with the contract could not find buyers because no one with the capacity to take delivery wanted it.
“No one wants to take delivery of oil next month because there is nowhere to store it, so the price has dropped below zero,” said Rachel Winter, associate investment manager at Killik & Co .
The collapse in physical demand for crude products such as gasoline and jet fuel has left the storage platforms at full capacity or, as one trader put it, “They are close to the edge”.
Storage at the US oil center Cushing has already reached more than 15 million barrels in the past month – and should soon be at full capacity for the first time.
“The coronavirus is rewriting the rules of the global economy before our eyes,” said Adam Vettese, an analyst at eToro.
“With virtually no demand for oil, this rather surprising sale is almost entirely due to concerns about storage. “
Does this mean that oil prices will fall further?
“Oil prices and related stocks in the sector will remain broadly weak in the short term,” predicted James Trafford.
He said the supply reductions recently agreed to by Opec’s oil-producing economies are unlikely to be enough to balance the market anytime soon.
Opec is believed to be looking to cut oil production immediately, rather than waiting until next month, to ease price pressure.
“While Monday’s negative WTI futures price may have been a one-time problem, it confirms that there are problems ahead,” said Artur Baluszynski, director of research at Henderson Rowe.
“The Covid-19 crisis is destroying global energy demand and without a timetable for ending the deadlock in the developed world, the market is suffering from chronic oversupply. “
Will the price of gasoline go down?
Although the price of gasoline is tied to the wholesale price of oil, it is driven by competition.
This means that what motorists pay is not directly related to crude. Instead, suppliers control the prices at which they sell gasoline.
Above all, a key factor affecting the price of fuel is that most of the money you put back for a liter of petrol in the UK goes to the government in the form of a tax.
The fuel charge is billed at 57.95p per liter. On top of that, you have to pay 20% VAT on the cost of gasoline.
Less than £ 1 per liter?
Could this week’s oil price crisis see prices drifting below £ 1 for the first time since the late 2000s?
“In theory, petrol prices could fall below £ 1 per liter if the lower wholesale costs were reflected on the pumps – but at the same time people drive very few kilometers, so they sell quantities of ‘Much lower gasoline and diesel at the time,’ said RAC spokesperson Simon Williams.
This means that many forecasters will be reluctant to cut their prices further, he said.
At the same time, he said, greater pressure on gas prices could affect the viability of independent garages, which provide “essential service in areas where supermarkets have no points anchor ”.
“It would be bad news in all respects if these convicts closed their doors permanently. “
Are the prices at the pump fair?
Since the end of March, the wholesale price of gasoline has been around 16p per liter, according to the AA.
“Add a duty on fuel at 57.95p per liter, a generous margin of 9p per liter on suppliers / retailers, plus VAT and the average pump price of petrol would normally be around £ 1 per liter Said AA spokesperson Luke Bosdet.
Instead, the average price at the pump is higher because retailers say they have to charge 10p per liter more to make up for the lower fuel volumes they sell, he said.
Travel levels are around 40% normal during the work week, dropping to 20% on Sunday.
This meant that those who were still driving were “on average over a quarter overloaded per tank.”
“I suspect that when the lockout ends, the coronavirus will be beaten and the pipeline will start to return to normal, questions will be asked about the fairness of prices at the pump during the major oil accident in 2020.”