Just last year the worldwide demand for
crude oil averaged 100 million barrels
per day. The average price for a barrel
of West Texas Intermediate, the North
American benchmark, was $57 U.S. Western
Canadian select, the benchmark for
Alberta, sold at an average of $42 U.S. Good
Times. Not nearly as good as July 2008
when the average price for WTI reached
133 dollars. WCS was $115. That was just
before subprime mortgages and other
insidious financial products began to
topple the American banking system,
triggering the Great Recession. By
December 2008 the price of oil had
collapsed but WTI was still at $42. WCS
at $23. 
Those were rough times for oil producers.
But today's current market for crude is
worse, much much worse. WTI futures
contracts traded below zero dollars on
April 20th and 21st for the first time
in history. Sellers were actually paying
buyers to take their barrels of oil now.
Let's take that step by step. First you
need to understand that WTI futures are
traded on the New York Mercantile
Exchange which is not unlike a stock
market. A futures contract is an
agreement between a seller and a buyer
for a certain amount of oil delivered in
a certain month for a certain price. The
standard contract is for 1,000 barrels. A
barrel by the way is equal to 159 litres.
That's pretty close to the amount of
milk your fridge could hold if it was
stuffed to the gills with it.
A barrel of oil fluctuates in price
depending on supply and demand just like
any commodity. Travel restrictions and
physical distancing to contain the COVID-19 pandemic have shut down or
drastically reduced most economic
activity. Much of that activity runs on
crude oil and it's refined products like
gasoline, jet fuel and diesel. Demand for
crude oil has been
crushed. By some estimates global demand
dropped by 30 million barrels per day in
April. That's about 30 percent but
production and supply remains high. Much
too high in fact and the oil has to go
somewhere.
Ocean going super tankers that would
normally be used to deliver oil to
market are instead being used to store
it. Major producers in the U.S., Canada
Brazil and Norway have cut back output
by a combined 3.5 million barrels per
day. But the world is still awash in oil.
A price war between Saudi Arabia and
Russia flooded the market with ever
cheaper crude. Too much oil not enough
demand. Prices for crude have fallen off
a cliff all over the planet. The May
contract for WTI bottomed out at minus
$38 U.S. on April 20th. Traders could not
store the oil so they were paying others
to take their May delivery.
It was history-making, shocking and hard
to understand. Because at the same time
the June contract for WTI was trading
at more than $20 U.S., meaning buyers and
sellers could see a price rebound coming
again. Based on supply and demand that
price had slipped to $16 by April 24th.
The market's taste for slightly more
expensive oil in the summer of 2020 is
likely based on a couple of factors. Some
Canadian provinces, U.S. states and other
countries, are relaxing lockdown rules.
Businesses and industries are reopening.
Also, the 13 member OPEC and several
oil-producing countries like Russia said
they will cut production by 9.7 million barrels per day in May and
June, or about a third. Still WTI could
remain below 20 dollars through the rest
of 2020.
Political instability is often behind
big jumps in oil prices. Twelve years ago the
price of WTI was headed through the
roof,
driven into the $140 range. Reports at
the time said the price increase was due
to supply worries in the Middle East and
Africa. Though experts now call it a
bubble. The oil price crash in the fall
of 2008 and early in 2009 was directly
related to the Great Recession. But in
2011 WTI was back to a peak of $113, a
rise linked to supply worries caused by
the so-called Arab Spring. That was a
series of pro-democracy uprisings in the
largely Muslim countries of Tunisia,
Morocco, Syria, Libya, Egypt and Bahrain.
By January of 2016,
oil had bottomed out again with a WTI
in the mid $20.00. It was caused by an
economic slowdown in China and Saudi
Arabia flooding the world with cheap oil,
not unlike what has happened now. Then in
June 2018, oil was back at another peak
with WTI touching 74 dollars. Two major
factors were seen as catalysts. Venezuela
was in political crisis and production
was severely diminished, and American
president Donald Trump withdrew the
United States from the nuclear agreement
with Iran. As you know we continue to see
extraordinarily low prices. Yesterday
WTI was trading at $12 and WCS in the
$3.00 range. Now our best intelligence is
that we will be dealing with a low price
environment for for probably 12 to 18
months.
 
