The oil price is currently a sideshow, a curiosity in this developing economic drama, it could soon move centre-stage
The price of Brent crude has dropped almost 70pc since the start of the year, to just above $20 a barrel. The path of West Texas Intermediate, sold in the US, has been more dramatic still – down 80pc so far during 2020, to around $16 at the time of writing.
The demand for oil is, of course, being hammered by the coronavirus pandemic. With countless millions of cars, planes, trains and factories in lockdown, the global economy is using far less crude. But oil keeps coming out of the ground and storage capacity is getting tight as this monolithic industry tries to adjust. That’s why the unthinkable happened last week – when the WTI price crashed through the looking glass and deep into negative territory.
The main US oil storage complex, in the otherwise obscure town of Cushing, Oklahoma, has been significantly expanded over recent years, to accommodate the sharp rise in US production. The “shale revolution” has helped America overtake Saudi Arabia and Russia to become the world’s biggest crude producer – although the US remains a major oil importer too.
But while Cushing has increased capacity by around half since 2010, to 76 million barrels, more than 60 million barrels of that space is filled, with much of the rest already leased throughout May or needed to keep the massive storage plant moving. So capacity constraints are biting, with producers petrified of crippling blockages – which could halt their output entirely – offering cash to take crude off their hands.
Electricity futures prices quite often go negative – usage is highly unpredictable and storage technically complex. But this is the first time in 150 years of price records that oil has turned negative, driven by a lack of physical capacity to hold crude.
Last Monday, the price of the WTI futures contract for delivery at Cushing in May plunged over 300pc in a single day – which seems mathematically impossible. An extremely useful commodity, with a long shelf-life, oil is surely worth something? But storing copious amounts of a toxic, highly flammable substance is tough and costs money. And with the global economy in lockdown, storing it is all you can do.