What on earth is going
on with oil prices?
Well, it's a question that
seasoned commodities traders
have been asking
themselves, too.
The past few days have brought
unprecedented volatility,
way beyond the scale
of anything already
inflicted by the coronavirus
outbreak or by dysfunction
in Opec.
Prices have been under
pressure for some time.
The collapse in global
economic activity
means that the world simply
doesn't need that much of it
at the moment, but
producers are still pumping.
Too much oil and not enough
demand means sliding prices.
For months market insiders
have been warning that we're
going to run out of storage.
And then what?
The situation snapped
on Monday when
the benchmark price for US oil,
the West Texas Intermediate
contract, dropped off the chart.
Prices started the day
at around $10 a barrel,
and plunged to minus $40, the
first negative reading ever.
That means sellers
were paying buyers
to take the oil off their hands.
This particular price refers
to oil for delivery in May,
immediately before
that contract expires,
and reflects intense
pressure in that part
of the world for storage.
Nonetheless, it can't
just be waved away
as a market technicality.
Types of oil from other parts
of the world and for delivery
later in the year have
also come under pressure.
This is the market's way of
saying that the global economy
is in deep distress.
Companies and economies are just
not going to need a lot of oil
anytime soon.
This is going to impose pain
on oil producers, many of which
are loaded up with
debt that they're
going to struggle to pay back.
This is a poke in the eye
for Opec, the oil cartel,
and for Saudi Arabia and
Russia, which had hoped
to set a floor under prices.
It's embarrassing for
Donald Trump, who praised
their efforts to support oil.
I think they both
want to make a deal.
And they're both smart.
They love their countries.
They want to make a deal.
And it's a big
reminder to anyone
who's been helping to fire
stock markets 26 per cent
higher since late March
to check how much of that
rally is really down to an
improvement in the outlook
for the virus and how much
is just down to central bank
support.
This is a big warning shot.
