Crude oil prices below zero; know the reasons for the plunge

Oil prices plunged below zero for the first time on Monday (April 20, 2020) as demand for energy collapses across the globe amid the coronavirus pandemic and traders sought to avoid owning crude having left with no space to store it.

As the coronavirus pandemic decimates the world economy with the oil price turning negative, the price of the main US oil benchmark fell more than $50 a barrel to end the day about $30 below zero.

Countries around the world have tentatively taken up the decision on business-shutdown restrictions and are following lockdown to combat the spread of the coronavirus which lead to a collapse in the demand for oil and despite a deal by Saudi Arabia, Russia, and other nations to cut production in the wake of the situation, the world is running out of places to put all the oil the industry keeps pumping out — about 100 million barrels a day. 

The May delivery contract expired on Tuesday and so the oil trading volume was light, and one of the most important factor which lead to the massive fall in demand is having no place to store it leading to the swing in its price. The New York Times reported, ''Futures contracts that require buyers to take possession of oil in May are expiring on Tuesday, and nobody wanted the oil because there was no place to store it. Contracts for June delivery were still trading for about $22 a barrel, down 16 percent for the day.''

Some of the oil gluts are evident in Cushing, Okla, a critical storage hub where the oil that trades on the US futures market is delivered and according to Rystad Energy that Cushing has only 21 million barrels of free storage left out of the 80 million barrels capacity or less than two days of American production.

The oil infrastructure is complicated and it's not easy to turn off the taps as the economy of countries like Saudi Arabia and Russia is completely dependent on it. The coronavirus pandemic cut fuel demand worldwide by roughly 30% beginning in early March, but for several weeks, the supply of oil worldwide has continued to build.

Shutting down oil wells even for a shorter while and restarting again can cost heavy to these countries as they require expensive manpower and equipment. Fields do not always recover their former production. In addition, some oil companies keep pumping, even if they are losing money, in order to pay interest on their debts and stay alive.

At the start of the year, oil sold for over $60 a barrel but by Friday it hit about $20. 

The world has an estimated storage capacity for 6.8 billion barrels, and nearly 60 percent is filled, according to energy experts and the reserve can take only about 500,000 barrels a day.

Meanwhile, the oil prices bounced back on Tuesday, with US crude turning positive after trading below $0, but gains were capped amid unresolved concerns about how the market can cope with fuel demand decimated by the coronavirus pandemic. US West Texas Intermediate (WTI) crude for May delivery was up $38.73 at $1.10 a barrel by 0117 GMT after settling down at a discount of $37.63 a barrel in the previous session.