Plummeting oil demand and record-low prices could cause “pandemonium” in the market next month, Nandakumar Premchand, director at GlobalData, has warned.
It followed news that the price of West Texas Intermediate (WTI) May futures contracts nosedived 300 per cent on Monday and turned negative for the first time on record, meaning producers had to pay buyers to take barrels they could not store.
Premchand said that the coronavirus crisis has caused demand to shrink by 30 per cent, and many believe the 10 per cent cut in production will fail to stablisise the market:
Though OPEC+ decided to cut production by 10 per cent by 9.7 million barrels per day, that will only take effect in May,” he said. “Saudi has already lined up shipments for the United States. Given this and the storage space in the US fast filling up, we are looking at massive storage issues in the months to come.
The WTI June futures were trading at around $22. Taking note of the fact that exchange-traded funds like the USO will not take a physical delivery of oil, the strategies adopted by traders for the June expiry will be closely examined. With many feeling that the 10 per cent production cut wasn’t enough in the current times, it will be interesting to see if there are further production cuts or if the FED intervenes in some fashion to douse the fire.
Oil prices at these levels and the lack of demand will mean that we could be looking at pandemonium next month, especially if the lockdown extends beyond May. With companies signing up for floating storage tankers globally to store excess oil, even this option will cease to exist shortly.