Could crude oil slip into negative territory again?

Negative oil price means a long position holder would have to pay someone who is ready to take that oil off of their hands.

This is due to the fear of forced physical delivery during the contract expires. A massive supply glut amid reports of an insufficient storage facility in the U.S soil caused traders to avoid owning oil through the futures platform.

The coronavirus pandemic sapped global oil demand drastically. World oil demand is estimated to be about 100 million barrels per day but after the virus outbreak consumption declined by about 30 percent.

At the same time continuous operation from major production hubs elevated global inventory levels.

In early April, amid threats of oversupply and low demand, OPEC and its oil-producing allies agreed to a record output cut of 9.7 million barrels per day. However, the supply cut deal was not enough to drain the millions of barrels of the surplus oil present in markets.

Despite OPEC other major players like the U.S and Canada did not mandate any output restrictions for private companies so far. If the U.S continues with its present output levels, storage soon will run out completely and new barrels will not have a place to go.

In such a situation market dislocations like negative pricing could recur in the coming months as well.

As per the latest reports, the U.S inventories are at record levels in major delivery hubs with more than 70 percent of storage has been already filled.

The historic slump in oil price is now threatening the U.S oil drillers as well. Currently, the US is the world’s largest oil producer supported by technology-driven shale oil exploration.

The recent price action is a strong signal that oil is in a historic bear market. The negative economic impact of coronavirus outbreak and the ugly price war between Russia and Saudi Arabia added more oil into markets.

The negative oil prices are a foreboding sign about the outlook of the global economy as well. Feeble economic releases from the largest economies like the U.S, China, and Japan are signalling that the global economy is heading for a recession.

Recently, the IMF also warned that the world faces its worst recession since the Great Depression of the 1930s.

On the price front, swift price recovery is least expected due to weak fundamentals. A massive supply glut and feeble demand outlook continue to drive prices down.

However, reopening of economies, output restriction from major producers and economic boosting measures taken by central banks are likely to offer lower-level support to prices later.

On the technical side, a close below $9 a barrel would take prices further lower to $3 or even to negative territory. On the higher side, prices need to stabilise above $33 to negate the broad bearish outlook and take prices higher.

(The author is Head Commodity Research at Geojit Financial Services)

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