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COVID makes world oil less than worthless

COVID makes world oil less than worthless

Oil has plummeted to the  lowest level in decades as supply glut deepens, U.S. storage facilities are filling up quickly.  West Texas Intermediate, the North American standard, fell more then $7 US to just over $11, a drop of about 38%. Canadian crude is hovering just below $8.

Oil traders got caught in a desperate race to offload contracts for just about any price they could get.

The price of a contract to deliver West Texas Intermediate crude oil next month plunged below zero, as traders got caught in flurry to sell their contracts before having to actually receive the oil.

The oil price is determined through investments known as futures contracts, which are agreements to buy and sell a certain amount of oil at a certain time in the future. The contract to deliver oil in May has been the most commonly traded contract of late, so it is currently considered to be the best proxy for the current oil price. Soon June’s contract will be the benchmark.

Typically the contracts are bought and sold countless times before the oil is actually delivered to the final buyer. But the May contract is set to finalize on Tuesday, which means anyone holding contract at that point is agreeing to actually physically acquire the oil.

That’s easier said than done lately, as storage tanks in North America are almost full to the brim, making it hard to find a place to put more oil. The U.S. oil hub in Cushing, Okla., had 55 million barrels of oil in storage as of Friday, the highest level since 2018. Monday’s startling oil price plunge was caused by traders feverishly trying to offload the contract before they actually have to find a place to keep the oil starting next month. When the futures market closed for the day, the May WTI contract sat at -$37.63. If that price holds until the end of Tuesday, it means anyone holding that contract will have to pay more

David Winans, principal at PGIM, said the unprecedented price plunge “feels like oil is passing a kidney stone, a very painful move, but it can’t last for long, since producers are switching off wells as we speak,” he told Reuters.

Storage on land is filling up everywhere, so some producers have taken to storing their excess oil at sea, renting tankers to float aimlessly to store the crude until a higher price or buyer can be found. Rates for the biggest oil tankers have soared as producers scramble to secure space to keep the crude they don’t know what else to do with.

The going rate for the biggest oil tankers in the world hit $165,000 a day this weekend, Chappell calculates, but despite that up-front cost, “it is difficult to envision a scenario where floating storage is not economic and required over the coming months.”

The type of oil that comes from Canada’s oilsands is known as Western Canadian Select and it, too, has seen its price plunge in the current economic climate.

WCS typically trades at a discount to WTI since it is harder to transport and refine, but the sell off in WTI’s price has pushed the price of WCS below zero  — meaning Canadian oil companies are functionally having to pay to get rid of their product.

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