On July 17, 2020, the Energy Information Administration (EIA) reported that inventories of crude oil and petroleum products had exceeded 2.1 trillion barrels. This represented a significant increase in the amount of oil and petroleum products that were being held in storage.
One of the primary reasons for this inventory build was the ongoing excess production of oil and petroleum products. Many oil-producing countries had been pumping out large quantities of crude oil in an effort to maintain market share and generate revenue. However, as global demand for oil and petroleum products began to decrease due to the COVID-19 pandemic, this excess production led to a surplus of crude oil and petroleum products that needed to be stored.
Unfortunately, the high inventories of crude oil and petroleum products have had a negative impact on crude and refined product pricing. When supply exceeds demand, prices tend to fall, and this is exactly what has happened in the oil markets. As a result, many oil-producing countries and companies have seen a significant drop in revenue and have been forced to cut back on production and exploration.
In the long term, it is unclear how long it will take for oil markets to recover from this oversupply situation. Some experts believe that it could take years for demand to catch up with supply, while others are more optimistic and predict that the market could rebound more quickly. In any case, it is clear that the high inventories of crude oil and petroleum products will continue to have a dampening effect on prices in the short to medium term.
Ron Madriz
expand: On April 20, 2020, in the midst of the Covid-19 pandemic, inventories of crude oil in Cushing, OK climbed to over 65 million barrels and drove prices of West Texas Intermediate (WTI) to negative numbers for the first time in history. At the low, WTI prices dropped to nearly $40/barrel below zero.
On April 20, 2020, the global oil market was hit by a historic event, as the prices of West Texas Intermediate (WTI) crude oil futures contracts plunged to negative numbers for the first time in history. The cause of this price drop was a combination of oversupply and a sharp reduction in demand due to the COVID-19 pandemic.
In the weeks leading up to the event, crude oil inventories had been rapidly building up in Cushing, Oklahoma, which is a major hub for crude oil storage and delivery in the United States. This was due to a combination of factors, including oversupply from oil-producing countries, a lack of available storage capacity, and a steep drop in demand for oil and petroleum products as a result of the pandemic-related lockdowns and travel restrictions.
As the storage facilities in Cushing became increasingly full, buyers began to panic about the possibility of running out of space to store oil. This led to a dramatic sell-off in oil futures contracts, which caused the price of WTI crude oil to plummet to negative $40 per barrel at one point. This meant that sellers were essentially paying buyers to take the oil off their hands.
The negative pricing of WTI was a highly unusual event that shocked the global oil market and had far-reaching implications for the industry as a whole. It demonstrated just how severe the oversupply problem had become and how rapidly the market could respond to a sudden shock in demand.
In the aftermath of the event, many oil-producing countries and companies were forced to take drastic measures to cut production and reduce supply in an effort to prop up prices. The negative pricing of WTI also highlighted the need for improved infrastructure and storage capacity to prevent a similar event from occurring in the future.
Overall, the events of April 20, 2020, were a stark reminder of the vulnerability of the global oil market and the need for greater resilience and flexibility in the face of unexpected events such as the COVID-19 pandemic.