Oil suffers an imbalance. Will it return to negative prices?

In recent years, the oil market has been experiencing situations that seemed impossible.

On April 20, for the first time in history, the price of futures for a barrel of West Texas crude oil came to negative territory, until breaking the barrier of -37 dollars. Meanwhile, Brent, the European barrel, touched lows below 20 dollars.

This data, which has been classified by some international analysts as “something crazy,” is not just unusual, but also entirely opposite to what we saw in the previous economic crisis.

In the summer of 2008, the Texas barrel hit peaks nearing $ 150 a barrel. So far this time, it has only been below $25. Why has such a different scenario occurred now?

According to Giorgio Semenzato, Finizens’ CEO, says that the coronavirus pandemic has caused the dilemma of how to store the barrels produced, but not sold. The oil producers paid buyers to take the crude, in fear that their storage capacity would be exhausted. 

 

The return to normality will be slower

Link Securities affirm that the measures of confinement and paralysis of the productive activity adopted by many governments to combat the spread of the coronavirus of Chinese origin have caused a sharp drop in world demand for crude oil. The company adds that the damage caused by the paralysis of most of the major world economies is high. The return to normality will be complicated and, perhaps, slower than initially expected. 

Also, not all countries are going to be able to recover at the same time, since before the health crisis, the fiscal margin of many of them was already meager. Besides, the recovery will depend on the measures they adopted after the health crisis.

The collapse in the price of crude oil has occurred even though the world’s leading crude oil producers have cut supply. Demand for black gold has fallen at an even faster rate. Market figures suggest that while production has decreased by around 10%, demand has reduced by over 30%.

The barrel of Texas is currently moving around 25 dollars, while the barrel of Brent is trading around 31 dollars. Since the lows of three weeks ago, prices have recovered strongly. However, they have accumulated a decline of over 40% so far this year.