When oil became cheaper than a bottle of water

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By Dayo Ademola, Lagos



Something odd occurred in the crude oil markets days ago. Prices plunged so low that some oil traders had to pay oil buyers to bail them out. The price of U.S. oil, also known as West Texas Intermediate (WTI), dropped more than $50 a barrel to about -$30 per barrel—meaning that an oil trader trying to sell a barrel of crude oil had to pay a buyer $30. This was the first time ever that crude oil prices became negative and relatively cheaper than a bottle of water.

Oil futures contracts are structured for crude oil buyers to take possession of crude in May, so on the day before expiration, nobody wanted crude oil because oil storage tanks around the world were almost full.

Ugonna Ohiri-Anyanwu, CFA, a financial expert at one of the leading Tier 1 Nigerian bank, explained to Nairametrics the reasons crude oil had lost value. She said:

“Oil is a commodity; hence, it has a tendency to have large fluctuations/volatility in prices. Its prices are largely driven by the forces of demand and supply.

“Crude oil’s recent plummeting can be attributed to the decline or non-existence of demand, owing to the recent outbreak of the Covid-19 virus which has seen the whole world shut down its operations, thereby affecting logistics and the possibility for crude oil to be physically delivered.

“It was projected that the world demand for crude would decline by 30% by April 2020 and there is the possibility of a further decline in prices if demand continues to decline; hence, largest oil-producing countries are considering cutting supply to match the recent low demands and avoid a further decline in price.”

In addition, the demand for crude oil is still dropping, in spite of a deal brokered by the Saudis, Russians, and other oil producers to reduce oil production. The world is already experiencing an oil glut market, with about 100 million barrels of crude produced daily. As at the start of 2020, Brent crude sold at about $60 a barrel, but by Thursday, it dropped to about $24 per barrel.

Omeiza Makoju, ACCA, an energy analyst at an oil-producing firm, spoke on phone with Nairametrics explaining how cheap crude oil has become. He said: “As at the close of global markets on 29/04/2020, WTI and Brent prices per barrel were $15 and $22 respectively (Average volume of an oil barrel is 158.987 litres). Applying N360/$, which is our current exchange rate according to the “adjustment of price” by the CBN, the price of WTI and Brent per litre in Naira is N36 and N51 respectively.

“This interestingly shows that the current price of a litre of Brent is the same as the average price of a litre of bottled water in Nigeria. This is just a coincidence and does not answer the question. From a global perspective, the major cause of dwindling oil prices is the sharp fall in global demand. The sharp fall is as a result of the double whammy effect of the COVID-19 pandemic and the Saudi and Russian oil price war currently ravaging world economies.

“The bigger problem is the pandemic which has led to a shutdown of global economies and which in turn has led to a drastic reduction in the consumption of crude oil. The biggest consumers have had to shut down their industries and also have to contend with oil glut/storage difficulties offshore and onshore.”

He also explained in detail, how oil demand had plummeted, causing storage facilities to fill up rapidly.

“The global oil glut is also evident in the news with images of storage tankers filled up with oil, floating, and begging to be purchased at low prices. In the Nigerian context and in addition to the impact of the pandemic, it is also clear that there are other significant local constraints we face that makes us willing to sell at low prices in a bid to survive.

“Some of them include a lack of suitable oil refining and storage capacity, operational inefficiencies, host community challenges, and financing difficulties.”

Unfortunately, oil analysts believe that the prices of oil will continue to decline as global consumption of crude oil will remain low until a vaccine is created to treat COVID-19. How soon this will be remains the major concern of world leaders, as the killer disease has brought the world to it knees.



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