Prices could fall to zero: Brent crude drops to a 2-decade low as the global oil rout continues

REUTERS/Jim Urquhart

• Brent crude oil dropped to a two-decade low Wednesday, trading at as low as $15.98 a barrel as the global oil rout continued.
• One analyst said Brent prices were unlikely to turn negative – as WTI crude oil contracts for May did earlier this week – but could hit zero if storage concerns persisted.
• “If global storage is running out – and that is what the Brent trade is starting to suggest – then there will be no bid and prices could hit zero,” the person said.
• Brent pared its losses and was trading at $19.72 a barrel at 8:10 a.m. ET.
• Track the price of oil live with Markets Insider.

International oil prices continued to slide Wednesday, with Brent crude falling below $16, a more than two-decade low, as demand for the commodity slumps thanks to the coronavirus pandemic.

The weak trading followed a 24% drop on Tuesday for Brent amid increasingly negative sentiment surrounding West Texas Intermediate crude futures turning negative for the first time.

Brent continued to drop Wednesday, falling as much as 17%, to a low of $15.98 a barrel early in trading. It reversed losses and traded higher at $19.72 a barrel as of 8:10 a.m. in New York.

A lack of storage options, particularly at a key storage facility in Oklahoma, amid the reduction in demand for the commodity has put pressure on oil prices and this week helped push WTI, the US benchmark, into negative territory for the first time.

Prices went negative on WTI as the futures contract for May expired, meaning anyone holding a contract was obliged to take delivery of the oil. With storage limited, traders resorted to paying others to take the contracts off their hands.

Negative sentiment and worry have now poured into the international oil market, reflected in Brent’s recent slump.

Read more: Meet the 20-year-old day-trading phenom who turned $20,000 into $3 million. He details his precise strategy – and shares how he made $11,400 in 2 minutes this week.

Historic lows for Brent come despite a recent deal by the OPEC and its allies to reduce supply by 9.7 million barrels a day starting next month.

Tuesday’s historic losses prompted some leading oil producers to consider cutting production immediately instead, The Wall Street Journal reported.

Reuters

Neil Wilson, the chief markets analyst at Markets.com, said: “The roll this Friday could be gappy, although Brent is cash settled, not physically, so in theory it ought not to be as troubled and negative prices are unlikely.”

“That said, if global storage is running out – and that is what the Brent trade is starting to suggest – then there will be no bid and prices could hit zero,” he added.

The coronavirus has forced every major economy into a lockdown and brought travel to a standstill. These factors have weighed down on demand for oil.

But Naeem Aslam, the chief markets analyst at AvaTrade, struck a more optimistic tone and said it was unlikely Brent prices would hit zero. 

“The spread between the US Crude and Brent has started to narrow, nonetheless, the chances of Brent falling to zero, or below zero, are minimum,” he said. “Having said this, the sell-off in oil is brutal, and it is highly likely that we are close enough to find a bottom.”

Read more: Wall Street’s best-performing fund this year breaks down its long-term strategy that’s outsmarting 99% of peers – and shares 7 stocks to buy for a post-pandemic world

Aslam said he expected OPEC to hold another emergency meeting within a week, given Saudi Arabia’s dependence on oil. 

“The sell-off that has been trigged in the Brent prices today is highly likely to put more pressure on OPEC+ to cut the oil production more,” he said.

Paul Donovan, the chief global economist at UBS Wealth Management, said the falling oil price was unlikely to affect consumers yet.

“The decline in the oil price is unlikely to be noticed by consumers in lockdown, ultimately, it may benefit companies (not in the oil industry) by lowering costs and helping to lower the real cost of capital,” he said in a morning note.

WTI could fall further 

The WTI contract for June also flashed red and plummeted by 68% to a low of $6.50 a barrel on Tuesday.

“The June contract, whilst not immediately facing the same liquidity problems as the May contract did on Monday, is going to be under pressure all the way to expiry with nowhere left in the US to take physical delivery,” Wilson said.

He added: “It too could turn negative if paper traders are left holding the baby close to expiry.”

The WTI contract for delivery in June bounced back somewhat Wednesday, and as of 6 a.m. ET it was trading just above $11 a barrel.

Read more: Goldman Sachs talked to more than 100 investors about the historic oil market meltdown. Here are their top 5 questions – and what the firm thinks about each one, from dividends to the prospects for oil stocks.