Today’s oil price fall is much more important than yesterday’s negative values. The headlines on Monday, April 20 were big news, because it seemed counterintuitive that oil prices would turn negative. In truth, it simply meant that storage prices were too high for sellers to sell their May delivery oil for positive prices. This was a one-off circumstance drawing attention because of how strange it was. Even Russian oil minister Alexander Novak said on there is no need to dramatize the fall in U.S. oil futures.
But the oil news on Tuesday, April 21 is much scarier.
Midday Tuesday, the June contract for WTI was trading down about 40% and Brent was down about 25%. Remember that when oil prices plummeted on March 9 (Asia time, which was really March 8 in the United States), the media touted the record-breaking selloff. Now, in these times of the coronavirus epidemic we have become accustomed to record-breaking selloffs in all markets. However, we should not be immune.
Today’s prices are terrifying for producers, and not just the shale companies and other high-cost producers. At mid-day, Brent is trading below $20 per barrel. That is a significant number psychologically, but it is also important because it means major producers are facing dire trouble. Oil watchers may recall that Russia said recently that it was satisfied with $40 to balance its budget. Well, prices are now less than half of that. For Saudi Arabia, such low prices mean that the kingdom’s government makes less than $3 per barrel in royalties from oil.
Yesterday’s negative pricing grabbed headlines, but today’s plunge will have deeper implications.
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