The oil market crash wasn't just due to storage. There is a combination of factors that led to this point.
All of the tools and techniques have been used. Nothing was sufficient to stabilize the markets- not even OPEC's deal!
We should expect an intervention very soon. But the question is: what options do we have?
20th April 2020 will go down as a special day in oil markets. WTI's May contract made a historic plunge, falling all the way down to negative 300 percent, closing at negative $37.63. As prices entered the negative territory many observers gave various reasons for it, most common was the storage facility. However, I believe that such an abnormal market move isn't and couldn't be just due to a single factor but is an outcome of many other variables as well.
Let's try and make sense of the events leading up to this crash.
On 8th March, 2020, Kingdom of Saudi Arabia (KSA), took the markets by surprise launching a price war (just as it did back in 2014) against Russia as an impending OPEC+ agreement couldn't come to pass when Russia rejected the offer to participate in the production cuts.
By cutting down the Official Selling Price (OSP) and planning to increase production to 13 million barrels per day (mbpd), KSA delivered a double-whammy to oil markets. The supply side equation suddenly gained weight as another factor, global oil demand, was taking a beating due to Coronavirus. KSA was increasing its production and shipping more oil to its customers, while global oil demand was expected to fall by more than 30mbpd - 30 percent of global oil production (that stands at 100 mbpd).
While the oil markets were jolted due to this demand-supply disruption, the central banks decided to use some tools and act. Federal Reserve Bank of America (Fed) slashed interest rates (3rd March,2020) before its scheduled meeting on 15th March, 2020. Nothing happened, the oil markets continued there downward slide while the financial markets cratered - stock markets all around the world halted, every now and then, within minutes after opening. Fed acted again and didn't wait for the decided meeting and cut the interest rates down to the range of 0 percent to 0.25 percent. The reaction from commodity and capital markets was, once again, tepid.
Along with these came the stimulus packages. Fed, not giving up, injected $1.5 trillion in the US economy while central banks all around the world reduced interest rates. All was being done to provide some respite to the global markets which seem to get drained by dancing to the bearish tunes!
Fed also decided to continue its bond buying programme and provided emergency financing of $1.2 trillion to banks. Trump came up with a $2 trillion dollar Coronavirus Relief Package too.
All these injections went in vain - markets wanted hope!
It came, only temporarily, as Trump tweeted and called for another OPEC+ meeting asking MbS to broker some sort of deal. In a nut shell, after much confusion, a deal of 9.7 mbpd was reached. However, the confusion remained. The nature of cuts, except for OPEC and Russia, wasn't clear: will they be voluntary cuts or decline in natural rate of production? What will be the baseline? How can and will the U.S. participate? If yes, what about the antitrust laws there?
Markets rallied a tad only to fall later. After this all hope was lost! The options
For appeasing the markets ran out. Oil prices started dropping.
Now came the Storage issue. Satellite imagery shows clusters of tankers at the U.S. coast.
The storage capacity was about to get full. As of April 10th 2020, 72 percent of the storage capacity at Cushing, Oklahoma was already filled. (It has a total capacity of 77 million, out of which 55 million was filled).
May contract was ending too. There have been a lot of inventory build ups as well. Those who held contracts of May didn't want to accept deliveries of oil and in order to avoid storage costs (that are already high) closed the deals. Prices crashed to negative 300 percent!!!
What's next? The world cannot go on like this. But, as explained above, every financial ammunition has already been used. There is only one option: another deal. But this time it will involve a cut of more than 25 mbpd to give some hope to the markets. Trump will tweet very soon and OPEC++ will meet again. Otherwise, G20 economies might suffer double-digit GDP declines, let alone developing world! (The views expressed in this article are not necessarily those of the newspaper)
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