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Frankfurt The next wave of sales hit the oil market on Wednesday morning. Meanwhile, the price of a barrel (around 159 liters) of European Brent crude fell more than 15 percent to $ 16.03. This makes the North Sea variety as cheap as it was almost 21 years ago. The price of North American crude oil of the WTI variety fell as much as five percent to about eleven dollars.
On Tuesday, the WTI price for June delivery had peaked at 40 percent at $ 11 at times. Since then, Brent has fallen 30 percent to around $ 18 a barrel.
The renewed liquidation shows that the historic late-night collapse on Monday night, which had temporarily lowered the price of US crude oil to less than $ 38 a barrel, was not a singular event, nor a single market failure. It was just the preliminary climax of a crisis that the oil market has never experienced.
The unprecedented drop in demand in the crown crisis, coupled with a price war by major oil powers and a record-breaking expansion of oil reserves, a cocktail that has made black gold not have value overnight for many market participants. Experts still disagree on what factors triggered the negative price of US crude.
The focus is on the future contract for WTI oil for delivery in May, which expired on Tuesday night and which was also the reference price for US oil until Tuesday night. Several market participants trade this supply contract on the Nymex commodity exchange, including oil producers, brokers and financial investors.
While oil producers, for example, use the futures market to hedge against falling prices, the futures exchange also attracts speculators who trade large volumes of oil with little capital. What is certain is that on Monday and Tuesday there were hardly any buyers who wanted to buy the expired future of May. Security forces the holder to accept crude oil of the WTI variety in May, at the Nymex delivery center in Cushing, in the US state of Oklahoma.
But storage capacities are extremely scarce in the United States. The approximately 8.7 billion liter oil reservoirs in and around Cushing are full or at least fully reserved. This makes it extremely difficult to meet the oil delivery acceptance obligation.
“Festival of slaughter in the oil market”: what the fall in prices means for private investors
But who invested in the May papers to the end and was forced to sell? Eugen Weinberg, expert in raw materials in Commerzbank believes that one or more speculators were caught on the wrong foot. “It can be assumed that the ‘failure’ was related to a single illiquid contract and had a technical background.”
Weinberg even believes that there may be criminals at work: “We attribute this to a combination of forced liquidations of one or more large investors and price manipulation. Because the late trade was reduced and it was prone to manipulation. “
Negative prices are not included in the broker’s trading systems, says Weinberg. Therefore, only a few market participants could have participated in the trade. Benjamin Louvet, a commodity expert and fund manager at French asset manager Ofi, confirms that negative prices have created uncertainty.
Only after the exchange operator CME confirmed on Monday afternoon that prices could also turn negative, the price of oil actually fell. But Louvet has another explanation: it was the American oil producers who desperately wanted to ditch their output on the futures market. “We saw a seller crisis. Power is in the hands of the buyers. “
Negative prices until June
Warren Patterson, chief raw materials strategist at ING-Bank, confirms: “In light of the extreme drop in demand, the tanks are filling up quickly.” As long as the problem persists, Patterson may still see negative prices in June.
To avoid having to shut down their production, oil producers have paid their customers in the meantime. Because once closed, many wells can dry out. American shale oil producers are extremely flexible, but cannot increase or decrease their production as fast as Saudi Arabia.
With the end of oversupply and the relaxation of storage capacities not in sight, oil prices are likely to remain low for the time being, Louvet says. “It is far from over. Single-digit oil prices are still possible.”
In view of the collapse of the price of oil, the historic agreement of the main oil producers to remove almost ten million barrels of daily production from the market as part of the Opec-plus alliance seems almost forgotten. “It is obvious to everyone that this is not enough,” says Louvet, especially since the deal will only go into effect in May.
The President of the United States, Donald Trump, who had pushed OPEC members to a deal and was already celebrated as the savior of the United States’ oil industry, is now embarrassed. There is already speculation in the markets about whether Trump will ban the importation of Saudi oil to support the US oil shale oil industry.
Saudi Arabia, the world’s second largest oil producer and the most important stabilizer of oil markets due to its reserve capacity, is also under increasing pressure due to falling prices. Riyadh needs $ 91 a barrel of crude oil for a balanced state budget, according to the Fitch rating agency.
Saudi Arabia’s Ministry of Finance is still assuming a nine percent budget deficit for the current year 2020. To continue like this, Finance Minister Mohamed Al-Jadaan will have to drastically cut public spending. At the same time, billions of dollars in protective shields were placed in the fight against the economic consequences of the crown pandemic.
The contribution of the national oil giant Aramco to the national budget continues to be enormous, despite the price of oil that fell dramatically: because with production costs of three dollars per barrel, much remains at the current price level. Saudi Arabia produced an average of 10.3 million barrels of crude oil per day in the first four months, and recently peaked at 12.3 million. The OPEC plus agreement allows 8.5 million barrels for May and June.
Gloomy panorama
The situation is even darker for Russia, which will also be able to produce 8.5 million barrels per day starting in May after the OPEC plus deal: the country needs a price of $ 42 for national oil to reach its end. month. .
It is particularly devastating to the Kremlin that the exchange rate of the national currency is also falling in parallel with the price of oil. This means: For a barrel of crude oil from the Urals, Russian oil companies will receive a third less in rubles than on average in 2019. Therefore, the Russian state will receive significantly less tax revenue.
The “double shock”, the sharp reduction in production and, at the same time, relatively low oil prices, would cause serious damage to the Russian economy in all channels, in the national budget, in its own consumption of oil, in investments and exports.
Jegenija Slepzowa, an economist at Oxford Economics, is convinced of this. Russia’s total export earnings are expected to decline by seven percent. In the 2009 global financial crisis, the drop was just 4.7 percent, Nordea Bank’s Russian economist Tatyana Yevdokimova calculated.
The fear of a banking crisis has already ended in Russia: the head of the powerful state bank VTB, Andrei Kostin, expects Russian banks to lose a good 30 billion euros. Gigantic loan defaults by many companies would have corresponding consequences for the financial industry. In the end, Russia will slide massively into recession.
But that is nothing compared to the difficult times that countries like Iraq, Nigeria or Algeria have to go through if the price of oil remains low. Fatih Birol, head of the International Energy Agency, recently warned in Handelsblatt about social unrest in these countries. Oil expert Louvet also sees it this way: “The weakest oil producers worldwide are in trouble.”
They have few more options to stop producing, some possibly forever. Therefore, Louvet believes: “It could be that today we are sowing the seeds for a new oil price crisis.” Loss of capacity could make oil scarce again in a few years, warns the fund manager: “It sounds incredible today, but the price of oil could be again.” go up to $ 70 or $ 80. “
Click here to view the Brent pricing page, here to view the WTI course.
Plus: What the fall in oil prices means for consumers and investors.
