Forbes Oil prices managed to recover some ground over the past few trading sessions, but they’re still well below where they started the year. The oil market is on life support after getting hit by both demand and supply shocks.
Since the COVID-19 outbreak emerged from China, the global oil market has been experiencing a massive demand shock that saw the need for transportation fuels fall dramatically as lockdowns spread across Asia, the U.S. and elsewhere.
COVID-19 decimated oil demand by shutting down much of China’s economy activity, which had accounted for 35% of global GDP growth, and basically brought an abrupt stop to global air traffic, reduced automobile traffic as much as 50% in many markets and economies around the world.
At the same time, Saudi Arabia and Russia engaged in a price war for market share, resulting in a sizable supply shock. The Organization of Petroleum Exporting Countries, Russia and other producers, a group known as OPEC+, has reached an unprecedented deal to withdraw about 10% of the global supply, but it already looks like too little, too late.
Demand may have fallen by as much as 30% and the world is possibly just weeks away from running out of storage space for all of the surplus oil. Producers are literally paying traders to take the commodity off their hands as oil prices turn negative.
In a physical commodity market, oversupply will always outweigh the soundbites and pronouncements of government officials seeking to talk up prices. Talk is cheap in a physical market like oil.
The storage tanks are full, everything is full, there’s no place to put the oil, which led to this farcical circumstance where the price of something which is necessary for the way we live, went in fact, subzero.
For the 1st time in history OIL for delivery is finding its “clearing price” at ZERO. The price went negative this week, signaling that there is no place to store all the crude the world is producing and not using.
This is an oil crisis unlike any other, and as things deteriorate, the unsavory side of geopolitics will likely emerge as the recent spat between (MBS) Mohammad bin Salman Al Saud Crown Prince of Saudi Arabia and Russian President Vladimir Putin clearly showed.
