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Will oil prices go negative again?

Article updated 28th May 2020.


On the 20th April, oil turned negative for the first time in history. It was due to low demand, a lack of storage and expiring May future contracts. You can read our piece on volatile oil prices here.


The June 2020 contract expired on the 18th May, but oil rallied and are currently over $30 a barrel (WTI).


To start to understand what's happening, we need to look at the different factors that can affect the prices.

Storage

Since the markets went negative, stocks had continued to rise in Cushing, Oklahoma, the main hub for US fuel. Stocks last week were around 2.7 million barrels higher than they were on the 20th April, according to the EIA petroleum status report. However, the week ending 15th May saw a draw of 5 million barrels.


This is the second week in a row that crude inventories have dropped, which follows a ten-week increase in stock and is a sign of reduced production and increasing demand.


US crude storage is 10% higher than the five-year average for this time of year. Gasoline (petrol) inventories have started to increase again after last week's drawdown and increased from 9 to 10% above the five-year average.


Production

US refineries are currently running at 69.4% capacity. Refining inputs are up 521,000 barrels compared to last week but down 23% in the same week the previous year.


The US rig count is currently at 318, according to Baker Hughes' weekly report, which is down 6% from the prior week and down 665 from this time in 2019. The US has made large supply cuts which have seen WTI close the differential with Brent to around $2 a barrel.

Demand

US demand for the past four weeks is down 19% from the same period last year, with gasoline being down nearly 29%.


However, there are signs that demand is starting to pick up, supplied gasoline was up in the week ending 8th May by 45% compared to the year low of 5,065,000 barrels a day in the week ending 3rd April. However, the week ending 15th May did see a 9% reduction on the prior week.


Traders

Traders holding expiring contracts were the main driver behind the negative prices. The shock to the market may have changed personal behaviours, and the news of decreasing stocks and increasing demand has led to a more bullish outlook.







Outlook

The world is looking to ease lockdowns in a bid to restart the global economy. Much of Europe believe the lockdown peak has passed.


This slightly more optimistic outlook then last month has already seen the price of oil increase in value, with prices sitting over $30. It's unclear what the new normal will look like and if demand will reach 2019 levels anytime soon.


China had led the recovery but failed to produce an economic outlook on Friday 21st May. Economies such as India are slow to recover and have slashed May forecasts.


How does this affect the UK oil price?

In the short term, it is unlikely to have much effect on UK pump prices as duty makes up much of the cost of fuel per litre. [link to article]. Pump prices are likely to have bottomed out, but due to the lower demand forecourts have needed to increase their margin per litre. As demand rises, these margins are likely to drop to levels experienced at the start of the year.


You can view our infographic on what makes up a litre of fuel in the UK here.


Longer-term it may affect investment and policy, with companies looking at alternatives to oil, such as renewables. It could also lead to a reduced amount of capacity in the oil industry, leading to higher long-term prices.

Sources:

https://tradingeconomics.com/united-states/cushing-crude-oil-stocks

https://www.eia.gov/petroleum/supply/weekly/pdf/highlights.pdf

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