The world could soon be drowning in oil

Oil hit an 18-year low this week. And we could even see oil prices turn negative.

“Wars have been fought for it,” says Spencer Jakab in The Wall Street Journal. Yet now “nobody wants oil”. As much of the world remains under lockdown, around a fifth of the world’s oil production isn’t being used.

Oil prices hit an 18-year low this week, with Brent crude down to $23a barrel and US WTI futures dipping below $20 a barrel. Prices have more than halved over the last month. Large swathes of the global economy are closed, says Caroline Bain for Capital Economics. That could mean an “unprecedented 10% year-on-year plunge in global oil consumption” in the second quarter. Meanwhile, on the supply side, output is increasing as one-time allies Riyadh and Moscow try to outproduce each other in an all-out battle for market share. 

Negative oil prices?

The markets got very excited about the Saudi-Russian oil feud last month, but if anything it is the global demand slump that is proving more significant, says The Economist. Covid-19 and the resulting lockdowns have obliterated the appetite for oil at “such an astonishing rate that analysts cannot adjust their models quickly enough”. Research firm Bernstein thinks that demand in the first half could be down by as much as 20% on the year before. In the absence of buyers, stockpiles of the fuel are building up. Bernstein points out that the projected 735 million barrels of extra production this year is set to overwhelm the 500 million barrels of storage capacity available in OECD countries. 

That raises the mind-boggling prospect of negative oil prices, say Emily Gosden and James Dean in The Times. Shutting down a well is an expensive decision, so a producer may prefer to keep pumping and pay someone to take excess oil off their hands, Goldman Sachs analysts say. 

However, other oil wells are not waiting around: 900,000 barrels per day of production have already been taken offline and that number is rising every day. So many well closures could even pave the way for a surprise “inflationary oil supply shock”: when the crisis passes and the world gets back to work there will be far fewer producers left in the market to meet surging demand. 

That suggests that there is method in the madness of the Saudi-Russian oil war, says Antoine Halff in the Financial Times. Analysts have deemed the two countries’ decision to engage in a market share battle amid a global pandemic “collective suicide”. Yet when prices fall off a cliff it is higher-cost producers, above all those in the heavily indebted US shale industry, who will fold first. Riyadh and Moscow, which can pump much more cheaply, can withstand the pain of low prices for longer than rivals from Texas to Tehran. The “real prize for [oil cartel] Opec”, the taming of US shale, “suddenly looks within reach”.

Recommended

What changes to the pensions charge cap mean for you
Pensions

What changes to the pensions charge cap mean for you

The government could raise the pensions charge cap – the amount you can be charged in your workplace's default pension fund. Saloni Sardana explains w…
27 Sep 2022
The best student bank accounts
Personal finance

The best student bank accounts

As we approach the start of an academic year, Ruth Jackson-Kirby rounds up what you should look for when choosing a student bank account and outlines …
27 Sep 2022
Earn 4.1% from the best savings accounts
Savings

Earn 4.1% from the best savings accounts

With inflation topping 10%, your savings won't keep pace with the rising cost of living. But you can at least slow the rate at which your money is los…
27 Sep 2022
The best offers for switching banks – earn up to £175
Personal finance

The best offers for switching banks – earn up to £175

You can earn up to £175 by switching your current account. Here are the best offers on the market today.
27 Sep 2022

Most Popular

Beating inflation takes more luck than skill – but are we about to get lucky?
Inflation

Beating inflation takes more luck than skill – but are we about to get lucky?

The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank…
26 Sep 2022
The pick of this year's best-performing investment trusts
Investment trusts

The pick of this year's best-performing investment trusts

Market conditions haven’t been easy, but these investment trusts have delivered strong growth, says David Stevenson.
23 Sep 2022
The hidden cost of employee share schemes
Investment strategy

The hidden cost of employee share schemes

Paying employees in shares comes at a cost to investors – but it isn’t always easy to see how much, says Stephen Clapham.
26 Sep 2022