Oil drops 12% on Storage Capacity Fears and Weak Demand, Futures Were Down as Much as 20%

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The novel virus has led to economic bizarre, speeding up the plunges in oil prices. The consumption rates of oil have reduced all over the globe. As such oil as an asset is losing its value. The giant oil-exporting countries are having it rough especially with the declining storage capacity.

As of Tuesday, the oil prices further declined by 10%, thereby extending Mondays 25% plunge. On Monday, West Texas Intermediate traded at $12.78 per barrel, equivalent to a loss of $4.16, a decline of 24.56%. While Brent Crude declined by 6.76%, hence sold at $19.99 per barrel.

Fear over storage capacity as oil prices plunge

Following the storage capacity fears, Bjornar Tonhaugen, head of oil markets at Rystad Energy said they needed to take immediate action as the storage problem was no longer theoretical. He said oil producers were going to have it rough because oil tanks were getting filled up.

On Tuesday, West Texas Intermediate oil reduced by 12% to trade at $11.24 per barrel. While Brent Crude oil traded 10 cents higher, equivalent to $20.09 a barrel each. Therefore, West Texas has recorded a greater plunge then Brent Crude.

Why oil prices are under pressure

The impact of coronavirus has led to reduced oil consumption rates. Especially since many countries have reinstated Draconian measures; banning travels, restricting movement, and closing borders. These measures have affected the travel industry.

“The June contract is falling due to the reality of demand levels being well below current production levels and limited storage options,” Reid Morrison, PwC oil and gas advisory leader, told CNBC. “Choppiness in the markets will be significant as economies deal with lockdowns and returning to normal,” he added.

Prices were also pressured after USO, United States Oil Fund agreed to sell all of its contracts for June Delivery from Monday in favor of long-term contracts. Cailin Birch says that was a bleak prospect.

With reduced consumption of oil, producers have reduced their output, nevertheless, that won’t combat the unprecedented plunge in demand for oil amid the pandemic. However, Exxon and Chevron, oil producing companies in the US have raised their output production despite an initial consensus between OPEC its allies. It was in early April when OPEC and its allies agreed to cut oil production by 9.7 million barrels per day.

Since 2017, It is the first time West Texas Intermediate and Brent have experienced great losses. Especially with no buyers, we don’t expect the losses to end any time soon. Storage capacity is also a problem now because of no buyers.

Can boosting demand and cutting extra output save the oil industry?

Bjornar Tonhaugen says negative prices are a possibility which can however be tackled. But how? He says the only way of turning things around is by boosting the demand for oil or further cutting production rates.

With the way things are most producing companies will be forcefully amputated. Hence the producing companies will have shut-ins as their only option to prevent oil from spilling from the full tanks.

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