It was an unusual beginning of the day, with markets and investors waking up to the news that crude oil prices have tanked so far south that the West Texas Intermediate (WTI) crude slipped below zero for the first time in the history, to a negative $40.32 per barrel. The fall in price was for the May contracts of WTI crude, bound to expire on Tuesday. The June contracts were still holding at over $20 per barrel, seeing a, relatively, small 4% fall. With this in mind, the crucial question is what’s in store for the world benchmark, Brent crude, which tanked from just below $70 per barrel in January to $25 per barrel in March.
“WTI crude prices have witnessed an incessant fall, where all the support levels were seen crumbling and price fell below $0 for the first time in history amid the demand destruction caused by coronavirus pandemic, but the bizarre movement witnessed in WTI crude does not mean Brent would also witness a similar fate,” Sugandha Sachdeva VP-Metals, Energy & Currency Research, Religare Broking Ltd told Financial Express Online. While Brent crude, the pricing of which is largely influenced by the oil cartel OPEC, might not see a fall such as WTI crude, experts are not ruling out the possibility of a fall from the current levels.
Ravindra Rao, Head of Research at Kotak Securities, too does not expect something similar to the WTI crude happening to Brent crude prices. “To understand the fall we have to look at the supply situation. There is extra supply and hence storage facilities are becoming full. Once lockdown opens across the globe, as economies are trying a partial opening, demand will go up,” Ravindra Rao told Financial Express Online. “OPEC+ has already committed to an output cut of 9.7 million barrels from May. So, it might go down to $10-$12 per barrel but negative pricing can only happen during expiry. A fall for Brent crude might come but a fall to such levels is not expected,” he added.
Even after a production cut was announced by the OPEC+ alliance, the US was still producing 12.3 million barrels per day, down from 13 million barrels in March. According to Yan Chong Yaw, Director of Oil Research & Forecast, Refinitiv, the fall “is a consequence of the still-heavy production coming out of the US, despite the sharp fall in demand globally and specifically in the US, with storage tanks in the country filling fast and running out of capacity.”
US shale, which is in pain, is among the factors that could help crude oil prices. “If US shale goes for a production cut then prices may recover. If the US buys crude for strategic reserves then that too could help the prices climb up,” Ravindra Rao said. On the other hand, a cut in US crude oil production would underpin both the oil benchmarks — WTI crude and Brent crude to a certain extent, Sugandha Sachdeva added.
With producers staring at the possibility of a production cut, Ravindra Rao said a reverse effect can be seen when things normalise. “There can be a situation with the production being cut and when things normalise after the lockdown the demand goes up and we see a shortfall in supply, that is a possibility.”