Oil benchmark Brent crude is in a tailspin
The Brent crude price fell 16.03percent to $21.47 a barrel after the collapse in oil demand saw West Texas Intermediate (WTI), the US benchmark for oil futures, falling to -$40.32 for May.
Oil crashed across the world as a combination of global recession, weak demand, coronavirus pandemic fears, and the continuing standoff between Russia and Saudi Arabia took hold.
In the US, one of the world’s biggest oil consumers, prices fell below $0 for the first time in history before stabilising to at least $1.65 per barrel in intra-day trade.
As the last day for trading in the May contract began on Monday, buyers decided they did not want to receive delivery in May.
Michael Treherne, portfolio manager at Vestact Asset Management, said the negative price was a temporary technicality in the market.
“The market breaking move yesterday (Monday) reflects the oversupply in the oil market at the moment. We probably won’t see negative oil prices again in our lifetime,” Treherne said.
The Covid-19 outbreak and the missed agreement among members of Opec sent oil prices into a tailspin, with lockdowns nailing the death knell for demand. Even the producers’ agreement to cut 9.7million barrels a day of production earlier this month has failed to stem the tide.
Old Mutual Wealth investment analyst Izak Odendaal said the low-price environment would not result in a deflationary spiral, given the substantial global fiscal and monetary policy interventions.
Odendaal said it would, however, exert downward pressure on inflation rates across the world.
He said the low crude price was good news for consumers, as South Africa was a net importer of oil.
“It means we will have lower petrol prices. However, due to the national lockdown, movements have been restricted. The low price is unlikely to have an immediate impact,” he said, adding that lower fuel prices would likely result in an ease in inflation.
“For the local economy, it is good news. It means lower inflation for the rest of the year, and it gives the South Africa Reserve Bank room to cut interest rates further.”
Carlo Alberto de Casa, chief analyst at ActivTrades, said although Brent had fallen noticeably, the collapse has been even more dramatic for WTI, the benchmark for US oil, with the May contract dropping below $0 a barrel, plummeting to an incredible -$40.32 at its most extreme.
“Oil has become so unwanted that traders were simply paying to not receive physical delivery of crude,” De Casa said. “However, with the May contract having now expired, the sharp contango in the market has seen the price to increase again.”
He said the June WTI contract was already trading at $21.22, while for July it was just below $27.
“If we look further out to September, the price is even higher and is above the psychological threshold of $30. This huge contango is driven by the enormous oversupply that is drowning prices in the short term. Some of this surplus should start receding in the medium to long term once the global lockdown, which has effectively turned the tap off on demand, eases.”