The oil market is broken, and there’s little to do to fix it but wait.
The US May oil contract settled at -$37.63 a barrel yesterday — the first negative settlement in history. Storage facilities in America are running at capacity, which is what led the price to plummet. Plus the May contract is expiring today, which made for very erratic trading.
But what’s really staggering about yesterday’s negative price is that the US oil market might get fundamentally worse the coming month, said Paul Sankey, managing director at Mizuho Americas, a Japanese bank.
“This negative price was not a purely paper anomaly,” but rather the meeting point of the financials and the physical realities of commodities, Sankey said in a research note today.
The physical reality of oil is that it is difficult to handle, volatile, potentially polluting, and actually useless without a refinery. If you had a stinking barrel of oil in your back yard, would you pay someone $100 a barrel to take it away? Yes, and you would probably be relieved you were not charged $300 a barrel,” Sankey added.
The oil market is in a full-on day-to-day management crisis, he added, and that won’t just go away.
Will we hit -$100 a barrel next month? Quite possibly,” Sankey said.
Reducing production will take some time, Sankey said, so this situation of too much oil and nowhere to store it is here to stay. At least for now, and until demand picks up again.