Low Oil Prices Could Stretch Into May, Analysts Say Following Historic Collapse

U.S. oil prices collapsed to historic lows on Monday, reaching as low as minus $40 per barrel as traders struggled with sustained low demand and storage capacity filling up around the world.

U.S. benchmark West Texas Intermediate crude May futures fell more than 305 percent on Monday, settling at minus $37.63 per barrel down from $55.90 earlier in the day. This marked the largest fall in the commodity's history and the first time ever that WTI futures had dropped below $0.

Elsewhere, the internal benchmark Brent crude price fell below $26 per barrel on Monday—down 8.9 percent—and continued its slide to below $20 per barrel on Tuesday morning.

Oil markets have been thrown into chaos by the COVID-19 coronavirus slowdown, which has sent demand for oil plummeting and supply ballooning. Meanwhile, the excess oil has been rapidly filling storage space around the world.

A price dispute between the Saudi-dominated OPEC cartel and Russia exacerbated the situation. Russia had been cooperating with OPEC under the OPEC+ agreement until March, when it broke with the bloc over proposed production cuts intended to boost price.

The Saudis retaliated by upping production, driving down the price of oil in the hope that Russian and its natural resource-dependent economy would sustain enough damage to force Moscow back to the table. The two sides have now agreed a historic cut in production, but this will not come into force until May.

Though Monday's price drop was dramatic, the figures were for the WTI May contract, which ends on Tuesday. Observers are now looking to the June contract—which expires on May 19—to try and gauge how long the low prices could last.

Thus far, the historic slide appears to be continuing. The WTI June contract fell as much as 42 percent on Tuesday to $11.79 a barrel, versus more than 300 percent for the May contract. For Brent crude, the June contract had fallen below $20 a barrel by Tuesday morning—its lowest in 18 years and down more than 25 percent from the start of the day.

Though Monday's chaos does not represent the much-predicted "end of oil," analysts have warned that prices are likely to languish until lockdown measures end and the world economy creaks back into gear.

Goldman Sachs warned that the June WTI contract would be subject to the same downward pressure as May, adding that another slide could occur Tuesday as the May contract closes.

According to Reuters, the bank also warned that the finite and dwindling storage space will necessitate sizable production cuts "to bring the market into balance" and move towards higher prices.

Rystad Energy's Bjornar Tonhaugen said the physical oil market is "broken beyond recognition." He suggested that a lack of storage space drove traders to sell off the futures to avoid taking delivery of more oil. Looking ahead, the pain is likely to continue.

"We believe the market will be under continued downwards pressure for the coming weeks as well, as supply shut-ins have not yet occurred to a sufficient extent to balance supply with the low demand," Tonhaugen added.

According to ING Economics, "negative prices could return for June" as storage is likely to be even more of a problem next month. Last month, analysts IHS Markit said storage space could be exceeded by 200 million barrels of oil by June. Though the prediction was made before the OPEC+ deal, observers have argued that the production cuts will not solve the storage issue alone.

Still, OCBC bank economist Howie Lee noted that Monday's collapse "is not the end of the world, and the negative prices are not reflective of the entire state of the market." Lee added that the storage challenge is "unlikely to be resolved unless demand either improves, or the U.S. cuts its output."

US, WTI, oil, price, drop, low, May
The sun sets behind smoke rising from the LyondellBasell-Houston Refining plant in Houston, Texas, on April 20, 2020. MARK FELIX/AFP /AFP via Getty Images/Getty