Oversupply means storage facilities are overwhelmed
US oil prices plunged into negative territory on Monday for the first time ever, as the coronavirus outbreak hit demand.
The price of a barrel of West Texas Intermediate, the American oil benchmark, fell to nearly -$40 a barrel. This is the first time a US oil benchmark has fallen below zero.
With producers running out of space to store crude oil, they have been forced to pay suppliers to take barrels off their hands.
Oil prices recovered overnight, but still remained below zero as trading started on Tuesday morning.
The price of a barrel of Brent Crude – the international oil benchmark – dropped 20% to below $20, its lowest mark since 2002.
Why is the oil price negative?
With countries implementing lockdown measures to bring the coronavirus pandemic under control, global demand for fuel has dropped dramatically as people drive less.
However, oil supply has not fallen as quickly. Oil-producing countries have continued to pump out crude from their wells, leading to an oversupply.
Will the price of petrol come down?
Since March, the price of petrol has fallen by 11p a litre. However, it is unlikely that this latest drop in the cost of oil will lead to much lower prices at the forecourts.
As not many people are using their cars at the moment because of the lockdown, there is little incentive for retailers to pass on savings to customers.
RAC fuel spokesman Simon Williams says: “The oversupply of oil continues to suppress the barrel price and it’s clear now that plans by some of the world’s largest oil-producing nations to limit production haven’t yet been enough to lift the price – there’s currently too little demand for oil in the first place.
“It’s right that retailers charge a fair price for fuel that reflects the price of the raw product, and in theory petrol prices could fall below £1 per litre if the lower wholesale costs were reflected at the pumps.
“But at the same time people are driving very few miles so they’re selling vastly lower quantities of petrol and diesel at the moment."
What does it mean for investors?
Following the news that the US oil price went into negative territory the FTSE fell 2% on opening today.
James Trafford, analyst and portfolio manager at Fidelity International, says: “Oil prices and associated equities in the sector will remain broadly weak over the near term.”
He says the decision by the OPEC and its allies, including Russia, to cut production by 9.7 million barrels a day will probably not be enough to balance the market soon.
Joe Healey, investment research analyst at The Share Centre, says: “These events could well have a lasting impact on the commodity which is commonly owned as a safe inflation-protected investment in portfolios and shows the disruption and dangers that the combination of politics and oil can have.
“The path ahead remains gloomy for oil as signs of lockdowns easing are nowhere to be seen. Despite new case growth slowing, the caution over a second outbreak could prolong the troubles for some time still, something that oil right now definitely doesn’t need.”
Some experts also believe that such a sharp fall in the price of oil could cause a rapid slowdown in global inflation, possibly leading to deflation in some countries.