US oil prices plunge into uncharted territory with broader implications on economy

The plunge in US oil prices into negative and unprecedented dip of 321 per cent for the West Texas Intermediate is reverberating across the markets and could further hurt a slowing American economy.

The free fall in price to a historic low of minus $37.63 for May contracts means that traders are ready to pay that price for a delivery of a barrel of oil.

This is due to the steep decline in demand because of the coronavirus shutdowns and as storage space nears capacity, forcing producers to dump the oil.

Experts told The National  that this is "uncharted territory" and described a negative effect that would further restrain the US economy:

Joe McMonigle, energy expert and president of the Abraham Group

The pandemic’s impact is that of a category 5 storm that has hit the oil markets today.

Negative pricing on the May contracts is dragging down the June ones and also the Brent prices.

A big problem for WTI is that storage is quickly hitting the full mark.

June will also be affected by lack of storage but it will be sensitive to potential moves on opening the US economy and generating some demand signals.

Oil markets just gave a crystal ball analysis of just how rough May will be for the US economy.

Energy is such a key driver in terms of jobs and GDP growth, so certainly it is a sign that the broader economy picture will get worse in May.

Bob McNally, expert and president of Rapidan Energy

Negative prices are at a brutal point but they are an effective way of dissuading production.

The core problem is the oil market remains oversupplied and that storage is vanishing.

Oil demand is falling in several orders of magnitude faster than supply, even with the announced Opec deal and the cuts. Given that, the price mechanism is just doing its job.

While collapsing oil prices obviously hurt oil-producing states such as Texas and North Dakota most directly, extreme oil price volatility is also negative for broader equity and financial markets struggling to cope with the health emergency.

Normally consumers would benefit from rock-bottom pump prices, but they are literally locked down and may be slow to resume travel once restrictions are lifted.

So whereas falling oil prices normally help consumers, offsetting producers' pain, in this case it's more of a net negative for the broader economy.

Ellen Wald, energy expert and senior fellow at the Atlantic Council

If we look at the share prices of major American oil companies, such Exxon and Chevron, they have fallen today, but it was a limited fall.

The price for WTI for delivery in June, which is in the $20s, is much more relevant for determining the health of these companies.

Shale companies are struggling, no doubt, but the fact that the May contract for WTI went negative isn't making it all the worse for others.

It doesn't mean much for the US economy, other than as a symbol of what we already know about oil demand: it has declined steeply.

Colt Ables, operations analyst based in Texas

We are in uncharted territory. This forces the hand of regulators in the oil and gas industry to consider the economic waste proposition more seriously.

As the railroad commissioners in Texas meet on Tuesday, they will have to examine the current condition of the market.

Government action, however, can have a positive impact on the oil prices in the short term.

The only glimmer from this is cheaper prices at the pump, but more pressure on the oil industry to realise efficiencies will ultimately mean job losses.