A drastic drop in global demand for oil and growing shortage of storage facilities has pushed the price of US to a level not seen since 1999.
As on Monday, there was a 19.3 per cent drop in the price of a barrel of West Texas Intermediate (WTI), the benchmark for US oil, to touch just $14.74 a barrel.
A huge slump in global demand for oil has been forced on because of the coronavirus pandemic which has put the global oil industry in significant pressures.
Oil prices in the US weakened further because of an additional factor – growing shortage of storage facilities in the country.
The global oil industry has been facing troubles for more than a couple of months now because of steady and dramatic fall in demand as well as because of aggressive market domination tactics and price wars between Russia and Saudi Arabia after the two major oil producers of the world failed to come to an agreement on deepening oil production cuts last month.
However, members of the oil cartel OPEC and its allies, together known as OPEC+, came to an agreement earlier this month to reduce global oil output by about 10 per cent to shore up prices. The deal also marked the largest production cut ever in the oil industry.
But according to some analysts, even this record cut in output is insufficient to prop up prices of oil globally by any significant degree.
“It hasn’t taken long for the market to recognize that the Opec+ deal will not, in its present form, be enough to balance oil markets,” said Stephen Innes, chief global market strategist at Axicorp.
Decisions to reduce output by oil producers in the United States and elsewhere have largely been commercially driven. Still there is more oil in the world than demand.
And the problem in addition to fall demand is the question of whether so much oil can be stored until various governments ease lockdown rules, imposed because of the novel coronavirus pandemic, and allow travelling to restart – which can increase demand for oil.
Storage capacities at sea and on land are being filling up fast. And if this trend persists, oil price is set to come under pressure.
For the oil market to stage a turnaround, there has to be a significant increase in demand for oil which in turn is dependent on the development of the global health crisis caused by the novel coronavirus pandemic.
Concerns that the storage facilities for oil in the US will run out of capacity continues to mount. According to ANZ Bank, the stock of oil at the main delivery point in the US, Cushing, reported an increase of 50 per cent since the beginning of March.
“It’s a dump at all cost as no one, and I mean no one, wants delivery of oil with Cushing storage facilities filling by the minute,” Innes said.
(Adapted from BBC.com)