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
Excerpts
Background
Crude oil is one of the world’s most valuable resources as most industries rely on oil to function. The price of crude changes in response to demand and supply cycles, policy changes, and fluctuations in the world’s markets. Besides, geopolitical events and severe weather that might create uncertainty can disrupt the supply of crude oil and its prices. For decades, the OPEC had been playing a crucial role and working with its oil-producing member nations to determine the prices by boosting or reducing crude production...
Crude Price Fall
Despite the global oil production agreement between the OPEC members and allies, the prices of the WTI contract, which was supposed to expire in May 2020, continued to drop. Of all the unprecedented swings in financial markets since the breakout of COVID-19, none was more shocking than the collapse in a key segment of the US oil trading. The slump in oil prices since early March hurt shale oil producers in the US, the world’s top oil producers. The fact that storage facilities and oil tankers were fast filling up raised concerns...
Factors Responsible
While investors and analysts tried to understand the technicalities of the oil markets that had contributed to the crash, others tried to work out what its impact might be on the economy. They said as many as 30 million barrels per day, which fulfilled about 30% of global demand, had been pumped into storage worldwide in the first two or three months of 2020. Industrial and economic activity had come to a grinding halt as countries across the world followed shutdowns due to the swift spread of the coronavirus...
Impact of Crude Fall
April 21, 2020, was the last day of trading for the WTI crude oil futures contract for May of the year. All the oil traded under this contract was set to be physically delivered the following month. After the expiry of the May WTI contract, speculative traders and companies rushed to unload contracts for May delivery. “With adequate storage in Cushing [Oklahoma] unavailable to those who need it, selling intensified in the May futures contract,” Wood Mackenzie analyst Ann-Louise Hittle said. "This issue is most intense for May WTI because oil demand is at its weakest." Investors holding May contracts showed their reluctance to take delivery of the oil and incur storage costs...
Looking Ahead
Analysts predicted that the future of crude oil prices would depend on the duration of the lockdown period. “There is little to prevent the physical market from the further acute downside path over the near term,” said Michael Tran, managing director of global energy strategy at RBC Capital Markets. "Refiners are rejecting barrels at a historic pace and with U.S. storage levels sprinting to the brim, market forces will inflict further pain until either we hit rock bottom, or COVID clears, whichever comes first, but it looks like the former." ..
Exhibits
Exhibit I: WTI Annual Average Oil Price (1976-2020)
Exhibit II: Closing Price of Crude Oil in the US
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