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Guarding the Borders from the Clutches of “Uncle Sam”: US Oil Trades Below Zero After the Largest Sink in Its History

Investors charged $ 37 to buy a barrel of crude

An oil pump operating at sunrise near the Texas town of Midland, USA.

Cataclysm in the oil market in the United States. The sector had never experienced a similar journey. The reserve tanks have run out of space to store more crude after the fall in demand due to the pandemic. And ships have even been used. The reference barrel price on the other side of the Atlantic, the West Texas Intermediate (WTI), fell to negative territory for the first time in its history after falling 305%. Investors charged $ 37.63 to buy a barrel in the US The decision by the Chicago market, WTI’s main futures trading venue, to authorize negative sales sparked panic.

The oil market is fulfilling the dire prophecies of the International Energy Agency (IEA), which last week warned that this would be the worst year in history for the oil sector. The outbreak of the public health crisis due to the covid-19 pandemic has confined half the planet to their homes. So there is not enough demand: consumption is plummeting and reserve tanks have run out of space to store more crude. Producers have no one to sell raw materials to and crude prices plummet. With no cars on the roads or planes in the skies, pandemic-affected economies no longer need to consume as much crude. For this reason, this Monday the oil market suffered an unprecedented hit. The tension in the markets, the biggest earthquake since the coronavirus crisis, pushed crude into negative territory for the first time in its history.

A barrel of Brent oil from the North Sea, a benchmark in Europe, also suffered after dropping 8% to trade for $ 25.8. The hit in the United States is more savage because there the powerful fracking It has contributed to making the country the world’s leading producer of crude oil. So now your market has overflowed.

Texas oil prices (WTI), which were already on the ground, started the day by subtracting value hour by hour and dangerously approaching negative territory. Until mid-afternoon (Spanish time) the Chicago market, the main place where oil futures are traded in the US, authorized the WTI to trade negative. Then madness broke out. The West Texas barrel was left to 305% of its value. In other words, at the beginning of the session, investors paid around $ 17 per barrel of oil and at the end of the night they received $ 37. Something unthinkable months ago.

“Refineries are rejecting barrels at a historic rate and with US storage levels reaching their limits, market forces will inflict more pain until they bottom out or the COVID-19 crisis clears. Whichever comes first, although it seems that the first has a better chance, ”Michael Tran, managing director of global energy strategy at RBC Capital Markets, told Bloombeg.

And, in that context, any cut in production seems insufficient. The reduction, starting in May, of almost 10 million barrels per day agreed a few days ago by the main producing countries does not manage to stop the price drain, and begins to threaten the viability of the extractive industry in many countries. “If energy consumption has dropped by 30% and OPEC reduces supply by 10%, there is still a big gap,” Elwin de Groot, Rabobank’s head of macro strategy, sums up to .. But cutting production further seems difficult, given the rifts between Russia and Saudi Arabia, which were already on the verge of leading to failure at the last summit.

Futures contracts also collapsed with the view that already stored reserves exceed demand and that the economic slowdown continues to limit consumption. The June contract for WTI futures fell by over 10% to around $ 22 a barrel. In Europe, the price of Brent holds up much better, and this Monday it lost 8%. However, it is barely paid at $ 26, less than half its value at the beginning of the crisis.

At current prices, the breakeven is threatened in many countries and companies are already beginning to suffer. Diego Morín, IG analyst, considers that the indebtedness of the sector could lead to bankruptcy of some North American oil companies dedicated to the fracking. “Having a barrel below the $ 50 barrier is detrimental to the shale industry,” he says. In view of the trend, it will take a long time for the market to pay that amount again.

Although the low price of oil benefits Spain, a country highly dependent on energy, the Ibex could not escape this Monday from the negative trend that came from Wall Street – New York opened with losses – and closed with a fall of 0.64%. The selective Spanish held the 6,800 points, but has not just consolidated its recovery and every day it moves away more than the coveted 7,000. Again, tourism stocks led the losses, amid increasingly negative economic prospects. On the other hand, the main European trading floors continued the comeback that started a couple of weeks ago, thanks to the momentum of positive data on the evolution of the pandemic.

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