Oil price has dropped below $18 per barrel in the United States as of April 17, 2020.
It is the lowest oil price recorded since November 2001 and it is mainly caused by the inability of the market to absorb the supply.
According to experts, the demand rates have dropped by 33% as a result of the coronavirus pandemic outburst. Business closures and work from home, social distancing and factory shutdowns have resulted in less oil consumption worldwide. However, as the global supply remains almost at the same levels, the risk of not having enough space to store the excess of oil rapidly increases. "At that pace, storage capacity will be full in the not too distant future," Ryan Fitzmaurice, an energy strategist with a special focus on the energy markets, at Rabobank, said.
Recently, a decision to reduce oil production by 10% was made by the Organization of the Petroleum Exporting Countries (OPEC+) but, it is doubtful whether this measure will be adequate.
Currently, oil repositories are filling at a high rate. According to the U.S. government's oil inventory report, there has been a 19-million barrel increase in the country's repositories in just a week. "We have crude oil backing up in the system in epic fashion. This is probably one of the most bearish, if not darkest reports I’ve ever seen,” John Kilduff, partner Founding Partner of Again Capital, stated. Crude stocks in the U.S. will probably remain at high levels at the beginning of the next month.
According to IEA (International Energy Agency), the reduction of oil demand in April is on the order of 29 million barrels per day, reaching levels that have not been reported since the mid 1990s. Therefore, there is no effective strategy to mitigate the economic losses. "There is no feasible agreement that could cut supply by enough to offset such near-term demand losses," IEA, reported.
Selling oil at such low prices for an extended time period will result in severe ramifications for companies that extract shale oil. Shale oil exists between layers of fractured shale, mudstone or siltstone. It is extracted by fracturing the bedrock and requires a costly procedure. Many firms will be forced to highly reduce or even stop production.
The price of oil has been reduced by 73% since early 2020 when the cost of a barrel was $63.27.
Sources: CNN, Financial Times, Economic Times
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