US oil prices turned negative for the first time on record on Monday after oil producers ran out of space to store the oversupply of crude left by the coronavirus crisis, triggering an historic market collapse which left oil traders reeling.
The price of US crude oil crashed from $18 a barrel to -$38 in a matter of hours, as rising stockpiles of crude threatened to overwhelm storage facilities and forced oil producers to pay buyers to take the barrels they could not store.
In plain English, this is how bad things are getting in the oil market: with negative prices, producers are paying buyers to absorb product. The result is refiners not taking on any new crude, meaning producers are rapidly running out of places to store the stuff.
Monday’s oil drubbing comes after some buyers were offering as little as $2 per barrel in Texas last week and 13% of domestic rigs were taken offline due to collapsing prices. And yes, Exxon (NYSE:XOM) and Chevron Corporation (NYSE:CVX) were two of the worst-performing names in the Dow today.
In late trading, 26 of 30 Dow components were in the red.
Oil’s chaotic collapse deepened on Tuesday with stocks around the world plummeting as the economic carnage caused by the coronavirus pandemic turned markets upside down. Oil prices rebounded barely above zero, with the US benchmark West Texas Intermediate for May changing hands at $1.10 a barrel after closing at -$37.63 in New York on Monday.
The price of oil has plummeted because very few people are flying or driving, and factories have shut amid widespread stay-at-home orders. Global demand is set to drop this month to levels last seen in the mid 1990s. At the same time, oil producers can’t slow their production fast enough, and all the extra crude going into storage is sending tanks close to their limits.
The market crash underlined the impact of the coronavirus outbreak on oil demand as the global economy slumps.
The rapid market decline of recent weeks had reached fever pitch on Monday as traders reached their last day to trade oil for delivery in May before the contracts expire. The deadline triggered a collapse in prices as desperate oil traders with more crude than storage space were forced to take action.
Daniel Yergin, a Pulitzer-winning oil historian, said: “The May crude oil contract is going out not with a whimper, but a primal scream.”
The price of oil from the US shale heartlands has been declining steadily in recent weeks following the biggest slump in oil demand for 25 years steps due to restrictions on travel to curb the spread of Covid-19. The fall accelerated amid rising fears that the global economy may be facing its deepest downturn since the Great Depression.
Oil producers have continued to pump near-record levels of crude into the global market even as analysts warned that the impact of the coronavirus outbreak would drive oil demand to its lowest levels since 1995. The emergence of negative oil prices is expected to prompt some oil companies to hasten the shutdown of their rigs and oil wells to avoid plunging deeper into debt or bankruptcy.
The crumbling oil market helped drag stocks to their second straight day of losses, and the S&P 500 fell 3.1%, to 2,736.56, following similar drops across Europe and Asia.
The Dow Jones Industrial Average slid 631.56, or 2.7%, to 23,018.88, and the Nasdaq was down 3.5% The losses were widespread, and all 11 sectors that make up the S&P 500 were down.
- The S&P 500 dipped 1.79%
- The Dow Jones Industrial Average slid 2.44%
- The Nasdaq Composite dropped 1.03%
- It would be reasonable to expect that the Dow’s oil constituents would be the worst performers today. Alas, that dubious distinction again belongs to Boeing (NYSE:BA), which plunged 6.71%.
In another sign of the worry washing over markets, Treasury yields fell further. The yield on the 10-year Treasury dropped to 0.57% from 0.62% late Monday, meaning investors are willing to get paid even less to get the safety of owning a U.S. government bond. At the start of the year, before economies worldwide went on lockdown to slow the spread of the virus, investors were getting paid about 1.90% to own a 10-year Treasury.
Even with all the chaos in the oil markets, some signs of economic activity on the horizon were poking through elsewhere. The Senate’s Democratic leader said negotiators reached agreement on major elements of a nearly $500 billion proposal to provide more loans and aid to small businesses and hospitals. Georgia’s governor, meanwhile, announced plans late Monday to allow gyms, hair salons and other businesses to reopen as early as Friday.
The collapse will come as a blow to US President Donald Trump who took credit for brokering a historic deal between the Opec oil cartel and the world’s largest oil producing nations to limit the flood of oil production into the market. The pact to cut between 10 million and 20 million barrels of oil from the market from next month was dismissed by many within the market as “too little, too late” to avoid a market crash.
At his daily White House briefing, Trump described the negative price as a “short-term problem”. He said the US was filling up its strategic reserves: “If we could buy it for nothing, we’re gonna take everything we can get,” he said.
The Guardian reported over the weekend that a record 160m barrels of oil was being stored in “supergiant” oil tankers outside the world’s largest shipping ports, including in the US Gulf. The last time floating storage reached levels close to this was in the depths of the financial crisis in 2009, when traders stored more than 100m barrels at sea before offloading stocks when the economy began to recover.
Historically weak oil markets are likely to bring lower prices for drivers at service station forecourts, but the price collapse will also hurt pension savings which are often invested in major oil companies through funds which track equity markets. The oil price crisis has already wiped billions from the market value of the largest oil companies, many of which will not be able to pay dividends if the market rout drags on.
Brett Fleishman, from climate campaign group at 350.org, said the collapse of oil prices is “another powerful example of how fossil fuels are too volatile to be the basis of a resilient economy”.
“We are experiencing an unparalleled upending in our economies. And it is time for the fossil fuel industry to recognize that, from now on, the cheapest and best place to store oil is in the ground,” he said.
“While this recession shows us that we desperately need sustainable, resilient, and stable economic systems, based on renewable, accessible and just energy sources, the fossil fuel industry is not only trying to profit off of the current chaos, but continues to drive us further into climate breakdown,” Fleishman added.
Oil prices began to rise again on Tuesday as oil traders turn their attention to trading oil for delivery in June.
The US oil market – known in the industry as the West Texas Intermediate price – is expected to trade above $20 a barrel this week, recovering from its slump into negative territory. The international oil price benchmark, known as Brent crude, is trading at around $26 a barrel.
In the U.S., the cost for a barrel of oil to be delivered in June plunged 43% to $11.57. That’s the part of the market that U.S. oil traders are focused on and trading most actively. For oil to be delivered next month, which is when storage tanks could top out, the cost of a barrel stood at $10.01. A day earlier, it fell below zero for the first time, meaning traders paid others to take the oil off their hands to get rid of the headache of finding someplace to store it.
Analysts consider prices for U.S. oil to be delivered in June and later as closer to the “true“ price of crude, along with prices for international oils. They did not drop below zero, in part because the storage issues aren’t as urgent for them. But they also slid Tuesday on the same concern: A global economy incapacitated by the virus outbreak doesn’t need to burn as much fuel.
Brent crude, the international standard, for delivery in June lost 26.6% to $18.74 per barrel.
“I don’t think there’s enough time even before the June contract to solve the storage capacity issue, so you see the June contract coming down sharply,” said David Joy, chief market strategist at Ameriprise Financial. “I don’t know if that persists into July and beyond, but at the very least, we’re going to be faced even at that time with a dramatic mismatch between supply and demand.”
Rising optimism among some investors that parts of the economy could reopen as infections level off have helped stocks rally recently, and the S&P 500 is up more than 20% since hitting a low in late March. The rally got its start after the Federal Reserve and Congress promised massive amounts of aid for the economy.
The recovery is expected to pick up over the second half of the year as tight restrictions on travel to help curb the spread of the virus are lifted, raising demand for fuels and oil. At the same time supply is expected to dwindle due to the historic deal to limit oil production and the financial collapse of weaker oil companies.
However, most analysts believe that oil prices will fail to reach the same price levels recorded at the beginning of the year before the outbreak. Brent crude reached highs of almost $69 a barrel in January before plummeting to less than $23 a barrel at the end of March. Many market experts predict the price of Brent will remain below $50 a barrel this year.
“It looks like we’re bending the infection curve, there are signs of economic reopening and the stimulus is there,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. “All of which are good signs for the markets where there’s a potential scenario where the economy starts to recover.”
But the data coming in on the economy in the here and now continues to be dismal, including a Tuesday report that showed the steepest drop for U.S. sales of previously occupied homes since 2015. Pessimists say the market’s rally has been overdone and that a premature reopening of the economy could lead to only more flareups of infections.
Companies are also describing the hit to earnings they’re taking due to the outbreak, with many pulling their financial forecasts for the year given all the uncertainty about how long this recession will last. Coca-Cola said Tuesday that its sales were on track to hit financial targets through February, but that all changed when stay-at-home orders became widespread in March. It said it’s hopeful that improvement could arrive in the second half of the year. IBM on late Monday withdrew its guidance for 2020 results and said it will reassess at the end of June.
“There’s still a lot of uncertainty about this market,” said Ameriprise Financial’s Joy, “and it’s understandable because the visibility on earnings and the economy even is very limited still.”