The crisis in oil markets began after the coronavirus outbreak spread to many countries affecting the global economy. Several countries proposed various measures that created limitations on trading activities between the states.
Despite the large supply of oil, the level of demand did not meet the supply. The whole scenario caused deflations as the prices of oil dropped significantly. Saudi Arabia is one factor that led to this oil price crisis.
Saudi Arabia worsened the situation by dictating its terms of oil production leading to a great price war with Russia. The OPEC and OPEC+ leaders have been holding meetings to solve these misunderstandings on a historic oil production cut.
The discussions progressed well, but recently there has been a greater drop in the oil prices. The capacity of oil is more than the oil storage level, hence bringing a fall of oil prices below the zero line. These oil prices fell below zero just as of last week.
Present situation on the oil markets price drop
The deal between the OPEC+ and G-20 countries concerning the oil production cut will be effective as of early next month. The biggest problem is that initially, there was ongoing transportation of oil by oil tankers and the situation on oil demand and storage is of concern right now.
Most of the oil refineries do not need oil, this will make the value of oil to be of great worry. The concern on oil value arises since it is not wise to possess the commodity and one has no means of storing it.
In a matter of 14 days to 2 months, all means of storage or transportation might be full. As of now, the oil industry is under great tension and pressure following the fall of consumers’ demands and production cut.
Explanation of zero pricing of oil in 3 levels
At level 1, experts explain this crisis by saying the COVID-19 pandemic depleted 30% of the oil demand as supply reduces. In level 2, they say the situation might be because of market technicalities.
Here, experts relate oil prices to futures in that delivery of oil prices will be at a future or later date. Prices went below zero on Monday last week when contracts were to end on Tuesday. This situation triggered merchants who were not prepared to have the deliveries to sell the contracts to the buyers.
Level 3 points out that the prices of oil were below zero were of the West Texas Intermediate. The West Texas Intermediate is the benchmark for the United States crude oil. The Brent Crude oil is down nearly over 68% since the beginning of 2020.
The West Texas Intermediate prices declining negatively made the United States’ oil useless. Its prices closed at -37.63 USD per barrel.
The opinions of experts
One expert says that despite the strain on Brent’s prices, he does not predict the global benchmark declining below zero as it’s with WTI. The West Texas Intermediate and Brent Crude oil prices are different and separate.
Some experts have an antithesis view as they foresee the prices of Brent declining below the zero mark.
More:
- Why the Oil Market Crash is Far from Over
- OPEC Market Hit Hard Despite Agreements to Cut Oil Production
