(Photo: New York Times)

Why oil prices may fall further

(Photo: New York Times)

News analysts are discussing the real possibility that oil prices which are now as low as US$25 per barrel, may slump even further, forcing producers to turn off their wells.

Oil prices, which hover around US$25 per barrel, could fall even lower. (Photo: Vessel Finder)

 The main reason at the moment is that the world is running out of places to store the commodity.

Additionally, there is the issue of discounts in the physical market, Bloomberg reported on March 25.

An across the board 60 per cent fall-off in price is due to the fact that many businesses have entered cold storage with the spread of the coronavirus,  and worse is to come.

Analysts note that while Brent and West Texas Intermediate crude have stabilised at around US$25 a barrel, the price rout is set to increase as traders try to offload cargo in the physical market.

Contributing to the falling oil price is the likelihood that there will not be sufficient storage for the commodity. (Photo: New York Times)

Bloomberg explains “Crude oil in the physical market trades at a premium or discount to Brent, West Texas Intermediate and other benchmarks.

“At times of surplus, premiums narrow and discounts widen. But the current situation is almost unprecedented, with discounts in some cases at multi-decade highs. Examples abound from Africa to the Middle East to Latin America.”

Bloomberg gave the example of cargo in Nigeria which changed hands at US$3.10 per barrel this month.

Stanley Reid, writing for the New York Times points to the specific problem of storage.

Caribbean Business Report contributor, Makhulu

He said, “massive, round storage tanks in places like Trieste, Italy, and the United Arab Emirates are filling up. Vast caves in Louisiana and Texas that hold the US Strategic Petroleum Reserve are being topped up. Over 80 huge tankers, each holding up to 80 million gallons, are anchored off Texas, Scotland and elsewhere, with no particular place to go.”

Meanwhile, producers are still increasing output. Saudi Arabia, the world’s largest producer, is still engaged in a price war with Russia following their disagreement over output cuts three weeks ago.

Dealers who match commodity traders or refiners that have oil they want to store with tank farm owners, are having a field day, the New York Times reports.

One trader who usually does two deals a week, charging one per cent per barrel, has done 120 in the last week.

Saudi Arabia has said it will increase its daily production come April, which will further drive down global oil prices.

The rout really began when China cut business activity in its economy in February in a bid to cut off the spread of the virus.

China says it is re-starting factories now, however there is a problem. Other nations are closing their economies as the virus is increasing its spread, now registering more than 400,000 infections globally.’

Analysts forecast that demand will fall by 14 million barrels a day in the second quarter of 2020.

Meanwhile, news analysts note the Saudis are slashing prices and promising to hike output by about 25 per cent to 12 million barrels a day, beginning in April.

Traders are benefitting, pocketing the difference between current and future prices.

Dealers are actively seeking more storage, as the deals continue to flow in on the physical market.

In Western Canada, the Times notes, space is running out with 40 million barrels of storage almost full.

In the United States, Cushing, its largest storage zone, is almost full as well.

Currently, about ten per cent of supplies are estimated to be flowing into storage.

Another sign of the coming glut are  the 81 loaded tankers — an unusually high number — currently  loitering off coasts around the globe, the New York Times said, noting also that US producers are being paid less. The price posted for various grades of crude that ranged as low as $7.61 a barrel.

American producers will be left soon, with no option to either drastically cut production or turn off the taps to wells, all together.

As for the production by the Saudis and Russia, which is yet to hit the market, dealers are praying that more storage will be found.