Unprecedented oil price drop more than an incident

The unprecedented drop in US oil prices yesterday (Monday, April 20) - as much as $40 a barrel was paid to get rid of physically deliverable oil - has a structural component. Demand may remain (much) smaller for years than before the corona crisis.

American airlines expect that the situation may not return to normal until 2025. It is even questionable whether the need for oil will return to the same level as before the corona crisis.

No more storage capacity
The fact that the oil price temporarily turned negative last night is unprecedented and has to do with the lack of oil storage capacity worldwide. Due to the gigantic surplus of oil, the rack is completely gone. Oil traders who lacked storage capacity and had to deal with expiring contracts therefore decided to pay to get rid of their contracts. Otherwise they would have had to physically transport the oil themselves. Up to $40 per barrel was paid.

Pandemic course determines
This concerns contracts that expire this month. Money is paid for June contracts, although the price is very low. After all, the demand for oil has also fallen structurally due to the corona crisis. There are hardly any planes flying anymore and road transport is also less intensive than normal. Analysts differ on how quickly the economy can get going again and with it the transport movements and demand for oil. Of course, this mainly depends on how the corona pandemic continues to develop. And the more transport movements, the greater the chance of the spread and revival of the coronavirus.

Negative electricity price
The collapsed oil market also has major implications for other forms of energy, both fossil and non-fossil. The natural gas market shows the same patterns as the petroleum market. There is much more supply than demand and there are logistical difficulties.

The production of wind and solar energy is also hampered by the corona crisis. Because the demand for energy, in whatever form, has fallen enormously. And the supply is not constant. That is why we work with a negative electricity price. On days when there is too much supply, from whatever energy source, you have to pay for the supply of electricity. Similar mechanism to the oil last night.

Special weather conditions
Precisely the production of wind and solar energy is currently running at full speed. Not only in the Netherlands, but in large parts of Europe. Due to the air pressure distribution, it is very sunny from the Benelux to the Ukraine and there is strong wind throughout the area. According to analysts, producers of energy, be it gas, coal or solar and wind energy, are the victims of the negative electricity price. Large-scale users and consumers will benefit from this, because energy will eventually become cheaper.

The price of Brent Crude oil has also fallen sharply in recent days. The negative price is about expiring futures contracts for May for US WTI oil.

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