Oil Price Drops To Historic Lows, Hundreds Of US Oil Companies Might Go Bankrupt

Of all the unprecedented swings in the global financial market since the COVID-19 outbreak, none has been as significant and shocking as the Monday’s collapse the key segment of the oil trading.

The contract for West Texas Intermediate crude (WTI), is the benchmark for the US crude oil prices closed last week at $18.27 (around Rs. 1,400) but on Monday, it plunged to negative $37.63 per barrel (around negative Rs. 2,888)

"Black gold" plunged sharply on Monday when investors worried that the demand of the market would decline due to the impact of the pandemic. In addition, the maturity of the upcoming May contract also has a strong impact on investor transactions.

During the session, WTI crude oil delivered in May on the New York Stock Exchange continuously plummeted and conquered unprecedented and historic low. At some point, the price even dropped to negative $40.32 (around Rs. 3,088). At the end of the trading session, each barrel of this type of oil was only negative $37.63.

But not all the contracts are negative. The June contract for WTI oil fell 10% to $22.54 (around Rs. 1,700), while the July contract traded at $28 (around Rs. 2,146). On London exchange, Brent crude delivered in June also dropped more than 6% to $26.35 (around Rs. 2,020) per barrel.

When the futures contract is about to expire, the price will usually get back to the actual market price of oil. This made WTI delivery in May continuously lose value in the last days. The fact that June and July contracts are still anchored at a higher level partly shows that a part of investors believe that oil prices are likely to recover in the later half of the year.

"Black gold" price was strongly affected when demand dropped because of the lockdown. According to analysts, demand for crude from refineries and tanks in the US is falling sharply when these storage tanks have been filled.

The COVID-19 pandemic dealt a blow to the global economy and reduced oil demand. Meanwhile, OPEC+ and other countries' production cut agreements are not sufficient to offset the demand for fuel that is dropping freely due to the pandemic.

"The real problem of the global supply-demand imbalance has started to really manifest itself in prices," said Bjørnar Tonhaugen, head of oil markets at consultancy Rystad Energy. "As production continues relatively unscathed, storages are filling up by the day. The world is using less and less oil, and producers now feel how this translates in prices."

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