It is an understatement to say that the American oil market is ass over head. For the first time in its history, American crude oil fell below… zero dollars on Monday. In the evening, a barrel of West Texas Intermediate (WTI) was trading at -37 dollars. Concretely, this means that producers pay $ 37 to give their barrel of oil. The petroleum industry holds the year 1859 for its year zero. Never in the history of black gold has the price of a barrel fallen into negative territory on the futures markets. In just one day, the price of this oil made in the USA and side in New York literally collapsed, going from 24.59 dollars a barrel of 159 liters to… two dollars at the end of the day, before making the big plunge in the negative to finally appear at -37 dollars the barrel. For comparison, it was worth around $ 114 in 2011.
Difficult to understand the why and how of such a situation without making a detour through these famous future contracts used by speculators and other investment funds in most commodity markets. In 99% of cases, these markets give rise to “simple” speculation between investors who bet on commodity prices. In 99% of cases, sellers of coffee, soybean, wheat and of course petroleum oil find a buyer before the contract reaches its expiration date. But this time, the mechanics to speculate has seized up. For several days, many speculators who had bought lots of 1,000 barrels of American oil (WTI) had the greatest difficulty in finding buyers. 24, 18, 10, 2 dollars, the decline may have been rapid throughout the day in most American oil markets … In vain. Not even when these same investors holding these future contracts have entered negative territory, ready to put their hands in their pockets to offer two or three dollars to those who would be willing to take delivery of these bulky barrels.
Speculative “course accident”
Everything changed on Monday at the end of the day, or more precisely at the last hour of the last day of the expiration of these May contracts. “Sif these contracts hadn’t found where to be delivered, then they were delivered to speculators, explains a trader in a Parisian trading room. Obviously not at the foot of their pharmacy … But anywhere else. And not honoring that delivery costs a lot more than selling at a loss, or even paying to get rid of it, and that’s exactly what happened. “
“It’s a simple accident in the world of speculation, considers for its part the specialist in raw materials Philippe Chalmin. To convince yourself, you just have to look at what is happening on the other futures contracts. For the WTI maturing in June, prices oscillate around 23 dollars, the same thing to within a few dollars for Brent listed on the European markets.
Storage capacity saturation
In addition to the peculiarity of this market, the enormous saturation of black gold storage capacity was added. In less than 8 weeks, global demand for oil has dropped from around 100 million barrels per day to less than 67 million barrels per day due to containment and the fall in air transport in particular. Certainly, the oil-producing countries saw the fall in demand. They even tried to adapt, but not quickly enough and too little. Worse, against the backdrop of bickering and other three-strip billiards, the OPEC member countries did only tiny reductions in their production, or fifteen million barrels a day. The last agreement was made on April 11. The markets first bought it, the prices of the world’s largest oil producer (the United States) and those of Saudi Arabia had even started to recover. But the scissor effect did not stop there. Clearly: on the one hand, a drop in demand in a world where more than three billion people are confined and where the coming recession threatens to turn into depression, and on the other, oil producers who continue to pump.
“The United States has planted itself, it should have drastically reduced its oil production, says Philippe Waechter, director of economic research at Ostrum Asset Management. When we look at WTI’s daily production in the United States, we quickly realize that they continue to pump a dozen million barrels a day, no wonder we are there. By trying too hard to protect his boyfriends who have invested in unconventional oil, Trump finally shot himself in the foot. “ And pumping without consuming had only one effect: filling all the storage places to the brim.
Towards chain bankruptcies?
With the collapse in demand for petroleum products, storage capacity is filling up at high speed around the world, including at sea supertankers. The cost of storage is exploding, increasing the downward pressure on prices crude. To the point that the sector is desperately looking for solutions to store the surpluses that are accumulating around the world. The effects of such a situation on the black gold market could quickly turn into a large financial disaster. Because if the United States has become the first producers of black gold before Saudi Arabia and Russia, it is thanks to shale oils and other unconventional liquid bitumen. And especially investments that number in the hundreds of billions of dollars. If the price of WTI were to remain (as low as June, July, August, etc.) as low as in recent weeks, many economists fear chain bankruptcies. The reason ? At less than 40 or 50 dollars, a lot of unconventional oil drilling is not profitable. Finance could quickly burn down what it revered yesterday. At the risk of sinking a little more the world economy.
Vittorio De Filippis
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