Crude Oil Price in the US: Moving Towards Uncertainty
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Case Code: ECON089 Case Length: 11 Pages Period: 2019-20 Pub Date: 2020 Teaching Note: Available |
Price: Rs.300 Organization : The US Oil Industry Industry : Energy Countries : United States Themes: Micro Economics, Pricing, Global Economy, Economic Slowdown |
Abstract Case Intro 1 Excerpts
Introduction
On April 20, 2020, the market prices of West Texas Intermediate (WTI) crude oil turned negative for the first time in history, closing the day at US$-37.63 a barrel. The price plunged due to a nationwide lockdown in the US to contain the COVID-19 outbreak that squeezed the demand for oil even as supply remained high. The COVID-19 pandemic and subsequent travel restrictions had compelled people to stay at home. As the pandemic brought the US economy to a standstill, refineries and airlines stopped buying oil due to lack of storage capacity. There was so much oil available in the country that American energy companies lacked sufficient space to store it. The overproduction of crude continued and there was almost no place left to store it. Fuel consumption across the globe also fell as people stayed at home due to the pandemic.
Besides the drop in demand, the oil industry was struggling due to a tussle among producers about reducing output. Although the Organization of the Petroleum Exporting Countries (OPEC) and allies agreed to cut oil production earlier in April 2020, it was too late to prevent a massive oil glut as the storage capacity for oil had run out.
The supply and demand gap became so wide that industry experts said it could take quite some time for things to get back to normal. Lack of storage space forced producers to pay buyers to take barrels off their hands or find a place to store it. "The supply-and-demand balance for oil is so out of whack that global demand cannot grow fast enough and suppliers can't cut supply quickly enough to put things back in order," said Frank Verrastro of the Center for Strategic and International Studies (CSIS). After prices turned negative, Donald Trump (Trump), President of the US, promised a financial lifeline, including a funding plan, for embattled oil producers. Analysts were optimistic that the market conditions for crude oil would improve in the coming months. But the causes for concern were the time it would take for the oil prices to return to normal and the impact of the negative prices in the long run.
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