Editor's note: COVID-19: Economic Analysis is a series of articles comprising experts' views on developing micro and macroeconomic situations around the globe amid the COVID-19 pandemic.
U.S. oil futures plunged again Tuesday on fears that the global storage for crude will soon get full as the COVID-19 pandemic continues to cut demand. An analyst said the price may hit negative 100 U.S. dollars a barrel next month.
The U.S. benchmark West Texas Intermediate (WTI) for June delivery lost 20 percent to settle at 10.07 U.S. dollars a barrel, coming on the heels of a 25 percent plunge in price on Monday.
International benchmark Brent crude also slid on Tuesday, falling by three percent at 20.50 U.S. dollars a barrel after its 23.7 percent weekly drop.
"Crude oil inventories are rising at an amazing rate from the end of March to the OPEC+ (OPEC and its allies, including Russia) production cut effective in May. This is the direct cause of panic in the U.S. crude oil futures market," Li Li, China head of analytics with ICIS, a global commodity intelligence provider, told CGTN.
U.S. stockpiles rose by 15 million barrels to 518.6 million barrels for the week ending April 17, according to the U.S. Energy Information Administration. Cushing, where the WTI contract is priced, saw weekly inventories at five million barrels. It is also the largest storage facility in the U.S. apart from the Strategic Petroleum Reserve.
Last Monday, the May futures contract for WTI crashed by 300 percent from 17.85 U.S. dollars a barrel to minus 37.63 U.S. dollars a barrel, for the first time in history and the worst level since 1983. Traders are worrying the same fate could befall the June contract which expired on May 19.
Will the June futures hit -$100/barrel?
"Will we hit negative 100 U.S. dollars a barrel next month? Quite possibly," said Paul Sankey, a veteran oil analyst at Mizuho Bank who correctly warned of negative crude price in March.
"That is the situation we are in, of producers having nowhere to go with the inexorable production that takes weeks and months to reduce to zero," Sankey continued.
"We have clearly gone to full scale day-to-day market management crisis, and as we said when we first called for negative prices, the physical reality of oil is that it is difficult to handle, volatile, potentially polluting, and actually useless without a refinery," he added.
However, Li has a different view, "The possibility of dramatically negative price is quite low." She explained, "The negative oil price last Monday was well psychologically tested, and most people will avoid the risk. When the June contract expires, OPEC+ production cut has begun."
Li's view is echoed by Sero Qu, Senior Supervisor of Index R&D Department at Shanghai Petroleum and Natural Gas Exchange. "The U.S. crude benchmark could again plummet into negative territory, but negative 100 U.S. dollars a barrel is unlikely," Qu told CGTN.
"After oil futures tumbled to negative 37 U.S. dollars a barrel, many fund companies have recognized such a risk. They will gradually withdraw from the market. For example, ICBC has suspended access for new investors to crude oil products. Thus, retail investors will be restricted to enter the volatile market," Qu explained.
Gao Xinwei, a professor from China University of Petroleum also forecasted the negative price earlier this month. He told CGTN that the storage capacity at Cushing has limited impact on the June futures, and it is the worldwide oil storage facilities that matters, not just one oil depot.
"The negative 100 U.S. dollar a barrel would definitely not appear, if the OPEC+ could further cut production," Gao told CGTN.
Earlier in April, OPEC+ agreed on a record production cut that would slash output by 9.7 million a barrel a day beginning this Friday, about 13 percent of global production.
But Gao thought the agreed cuts simply won't be fast enough to address the global glut. He predicted that if OPEC+ could reduce production by over 30 million barrels a day, it may save negative oil price.
"If the OPEC+ could instantly expand the output cut, the oil price would return to 40-60 U.S. dollars a barrel within one week, rather than dip into negative territory. Only decisions by OPEC+ can quickly pull back oil price, and all other factors are relatively slow," Gao said.
Will oil bankruptcies in the U.S. help?
On Sunday, Houston-based contract drilling company Diamond Offshore Drilling filed for bankruptcy protection in Texas, making it the second substantial public company to do so after Denver-based Whiting Petroleum filed for bankruptcy on April 1. Analysts predict that more bankruptcies could be coming.
"An increasing number of U.S. oil companies filing for bankruptcy protection would be helpful to resume oil price," Gao told CGTN.
Small and medium-sized oil companies in the U.S. believed that they had to earn each point that they could earn, because the investment had been put in the earlier stage, and bank debt was so stressful. So they persisted in production, resulting in nowhere to stock the oil output, Gao explained.
"With debts due, hundreds of oil companies in the U.S. will have to close down. Oil prices would never rise and the market would never get better, if the U.S. oil companies didn't go for bankruptcy," he said.
For the U.S. is a market economy, and it can only rely on bankruptcy to form a natural oil production cut. "If all countries reduce output, OPEC+ will feel fair, and further output cut will be easily agreed," Gao explained to CGTN.
Are negative oil prices good for consumers?
"Oil price has fallen to cheer people. It's cheaper, and China's imports are cheaper. But such a low price destroys the energy industry, which is the foundation of all other industries. It will affect all other industries," Gao told CGTN in response to the saying that the decline in oil price is good for Chinese people and the country.
China is the world's biggest crude oil importer. In 2019, the country imported a record 506 million tonnes of crude oil, setting a record for a 17th straight year, according to data from the General Administration of Customs.
"It will destroy the entire economic structure. It's not simply that the lower oil price, the better [for consumers]. It is hoped that the price can be within a reasonable range, which is the best choice for other industries and related industries as well," Gao explained.
WTI for July delivery dropped by more than 14 percent to 18.18 U.S. dollars a barrel, while the August contract slipped by over nine percent to 21.50 U.S. dollars a barrel, suggesting that the Wall Street doesn't see a meaningful recovery in the coming months.
Links: CGTV: Oil plunges again, will it hit negative $100 a barrel next month?