The oil price is a commodity price that sets the standard for a lot of activity and trading of other commodities, sticks and bonds around the world. Today, Monday April 20th, 2020, marks a new day in history. The US oil price fell below 0 USD. Oil is priced differently according to where it is from, quality and characteristics.
The oil price crashed because of the overproduction that is happening in the oil market. The corona pandemic has reduced the demand in oil prices beyond what we have seen in many years, while the oil producers have continued to produce large quantities of all. The North Sea oil is still trading at around 25 USD and thus the differences in pricing are huge compared to what it usually is.
In the evening we even saw the price per barrel fall as low as minus 40 USD. That is a huge amount of money to receive to accept oil. The pricing challenge has occurred due to the lack of storage. The oil producers are dependent on a party buying oil, and the partner buying oil needs to store it somewhere. The current problem is that storage facilities are filling up. It is not so easy to just turn off the oil wells, but with the current problems, turning off the oil wells might be an alternative to giving away barrels of oil with a check attached to each barrel.
The collapse in the oil price will also cause political problems internationally. On April 11th the OPEC countries and their friends, called OPEC+, entered into an agreement to cut production with 9.7 million barrels of oil per day. This is about 10% of the daily production and considered a substantial number. However, even though substantial, the number is small compared to amounts of barrels per day continuously overproduced. We are currently looking at a daily overproduction of 18 million barrels per day. Rystad Energy has said that peak oil occurred in 2019 and that the oil overproduction was as much as 28 million barrels per day before the OPEC+ cut.President Trump will suffer a major political blow from the collapse in the oil price because he has gone to great lengths to protect the oil sector. Trump has been displayed in the media as the new master of oil policy when forcing through with about 10% in cuts per day, even though just for May and June. The American shale sector has transformed the US into the world’s largest oil producer in the past decade, giving the president a foreign policy tool, he has brandished as “US energy dominance”. That however is now changing quickly. There is no quick stop to the bleeding and the many bankruptcies that will come from the collapse. Are you following the news daily? It is time to tune in and protect your wallets as it is time to buckle down and take the hit.