US oil prices plunged to their lowest level in more than two decades on Monday as the outlook for America’s shale industry worsened amid sharply lower demand during the coronovirus pandemic. With planes grounded, businesses closed and billions of people under lockdown conditions at home, demand for oil has dropped more precipitously than ever before.
West Texas Intermediate, the key US benchmark, dropped 41 per cent to as low as $10.77 (£8.50) amid fears that America’s oil storage capacity will fill up within weeks, forcing production to stop. Turning off production can be costly for oil producers, meaning they have kept pumping out crude, while refiners who split it into petrol and diesel, as well as the commodity’s other constituent parts, have cut back on activity.
As a result, storage capacity has filled up rapidly, particularly in the US where much of the industry is far from the sea and therefore reliant on pipelines and storage facilities. Some of the price decline has been passed on to drivers with petrol prices in the UK dipping to 11p a litre over the past month, but the AA said retailers had been slow to deliver the benefits.
That will hurt the oil industries in North America and Russia most, due to the geology and location of supplies there, the Wall Street bank said. America’s fracking industry is widely forecast to suffer scores of bankruptcies this year as producers lose money when the oil price is low.
Jeff Currie, Goldman’s global head of commodities research, said the pandemic would “permanently alter the energy industry and its geopolitics, restrict demand as economic activity normalises and shift the debate around climate change”.
Part of the decline in prices on Monday was due to a technicality of the oil market. Most oil is traded via contracts based on its expected price on a future delivery date. May futures contracts are due to expire on Tuesday meaning traders are keen to offload them to avoid having to take physical delivery of oil and find a place to store it.
Stuart Joyner, an energy specialist at Redburn, said: “The remarkable collapse in US crude prices is partly technical as we see funds position for the imminent contract expiry or ‘roll’.”
However, he predicted prices over the summer reflect the fact that traders see storage capacity reaching its limits and are concerned about a longer-term reduction in oil demand.
“Cuts in production from Opec+ [the cartel of oil-producing countries] will help with rebalancing eventually but do not start yet. Russia is actually still supplying more oil to the market in the near term, and US shale volumes are holding up despite the worst rig count there since 2015.”