Market Overview

Since the beginning of the spread of the new coronavirus, it has been possible to observe oil prices falling substantially. Saudi Arabia cut its oil selling prices and increased production after Russia refused to adhere to its plan to further reduce production and raise prices in early March. The Russians ended up retaliating and the two countries reversed the course of the oil policy and were moving towards a greater market share. As a result, everyone was penalised and the United States was clearly affected since its production would largely cease to be economically viable with prices below $50 a barrel.

Two weeks ago, an extensive production cut agreement was reached - equivalent to a reduction of $10 million per barrel - having been the largest in history. However, oil prices continue to fall, as investors are not convinced that the cuts are sufficient enough to counter the destruction of demand caused by the virus. This lack of demand has left the world with more oil than it can use.

Another big problem also has to do with whether we can store it until social containment measures are facilitated enough to generate some additional demand for petroleum products. Storage capacity is filling up quickly and as time goes on, prices are likely to drop further. A recovery in demand will be needed in order for the market to start to recover and this will probably depend on how the crisis of public health will unfold. There may still be further cuts in supply as private sector producers respond to low prices, but it is not likely to have a fundamental impact on the market.

This Monday, April 20, also turned out to be a historic day for the price of oil. The West Texas Intermediate (WTI) May futures contract closed at a negative value of -37.63 Dollars per barrel (after reaching a negative value of 40 Dollars), something that has never happened before. This means that the holder of a purchased position would be required to pay to get the agreement in hand. The reason for this decline is precisely the fact that there exists sufficient storage, so oil can be taken here and when inventories are emptied, then price can get back at least the digit positive.

The negative prices of oil futures contracts as well as the low price of a barrel - it is quoting at $ 15 per barrel (lowest value since 1986) - are a consequence of the current context that we are living in and could translate into prices reaching even lower. Gasoline has one point positive for the consumers who have been most affected by this crisis.

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