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Why does the price of oil keep dropping? 3:41
(CNN Business) - The victory of US President Donald Trump for convincing Russia and Saudi Arabia to cut oil production seems excessively premature.
US oil prices fell another 8% this Friday and ended at $ 18.27 a barrel, its lowest point in 18 years. At one point, crude oil fell to $ 17.33 a barrel, the lowest price since November 2001.
The accelerated crash in the oil market reflects the understanding that record cuts in OPEC production are nowhere near enough to offset the large collapse in demand due to the coronavirus crisis.
A gallon of gasoline is less than $ 1 in the US 1:18Oil shot up to $ 28.34 a barrel on April 3, after Trump hinted that Saudi Arabia and Russia would make massive cuts in production. After OPEC finally agreed to that decline last weekend, Trump thanked Russian President Vladimir Putin and King Salman of Saudi Arabia for solving his recent price war.
"This will save hundreds of thousands of jobs in the energy sector in the United States," Trump posted on Twitter on Sunday.
However, oil has renewed its auction in recent days and its value has fallen 36% in the two weeks following that peak on April 3. Since hitting $ 63.27 a barrel in early January, US crude has lost a staggering 71% of its value.
However, Friday's settlement was a bit odd. While US oil prices fell, Brent crude - the global benchmark - increased modestly.
Although the April contract for US oil slumped, the future contract for May held up well. April's contract expires early next week.
Analysts say this large gap between contracts could continue throughout the year because the world is rapidly running out of traditional storage spaces for oil. This situation will force oil companies to accumulate barrels in more expensive places, including ships. And the wider the extension, the cheaper these alternative options will be for storing crude.
"Until confinement measures are removed and production cuts begin, the market must find a home for these barrels," said Ryan Fitzmaurice, energy strategist at Rabobank. "To do that, you have to incentivize people to be creative with storage," she said.
The barrels have been accumulating at an unprecedented rate, increasing the risk that the world will soon run out of space to store them all. The number of barrels of crude in commercial storage rocketed over the past week to the highest amount yet recorded, according to a report by the U.S. Energy Information Administration earlier this week.
"At that rate, storage capacity will be at its peak in the not too distant future," Fitzmaurice said.
The nightmare of supply and demand continues
One of the main problems is that despite OPEC reaching a historic agreement, the effects of the oil price war still persist. The barrels continue to flow into the United States, flooding the market.
- READ: OPEC, Russia and Mexico reach a "historic" agreement to reduce oil production
The seven-day moving average in exports from central OPEC nations and Russia increased 3.5 million barrels per day during April compared to March, according to ClipperData.
At the same time, demand has gone off the cliff. Social distancing measures caused many passenger flights to be suspended, in addition to forcing people to work from their homes and that factories have closed. That means there is less appetite for gasoline, jet fuel, and other petroleum products.
Oil below $ 20 is a nightmare for American high-cost shale oil companies, especially those that have gone into debt to pay for drilling projects that are now uneconomical. Many will be forced to shut down production, striking the US oil boom hard.
Rystad Energy recently estimated that 140 US oil producers they could declare bankruptcy this year if oil stays at $ 20 a barrel, followed by another $ 400 in 2021. That would lead to the disappearance of countless jobs.
Falls Barrel Price Oil Prices