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Why the WTI crude oil price crashed to minus US$40.32 a barrel

Australian energy shares Beach Energy Ltd (ASX: BPT), Santos Ltd (ASX: STO), and Woodside Petroleum Limited (ASX: WPL) will be on watch today after one of the craziest nights of trade in oil market history.

Overnight the U.S. benchmark West Texas Intermediate (WTI) crude oil price traded as low as minus US$40.32 a barrel. Yes, you are reading that correctly. For the first time in history WTI crude oil is in negative territory.

This has been driven by the coronavirus pandemic, which has caused an unprecedented demand loss. Combined with limited access to storage capacity across the United States, there is quite literally no demand for WTI crude oil for delivery in May.

In light of this, prices have gone negative to reflect the costs of storing this oil for a few months while waiting for buyers to materialise.

Things were a little better for Brent crude oil. The international benchmark, Brent crude oil fell 7.3% on Monday night to US$26.04 a barrel. While demand for Brent crude oil is equally weak due to lockdowns globally, it is less impacted by storage issues at this point.

According to CNBC, John Kilduff of Again Capital notes that “the physical oil market conditions are a disaster, with growing concerns about finding available storage.”

What about the future?

But thankfully for Australia’s oil producers, Kilduff is a lot more positive on the longer term outlook.

He added: “The higher priced, longer-dated futures contracts are indicative of the market expecting some level of clearing in the cash market over the course of the next several months. Given the rapid decline in the U.S. oil rig count and the expected cutback by OPEC+ members that is a reasonable assumption.”

Though, he warned that as the next futures contracts reach expiration over the coming months, they could engage in their own “death march down towards the super-low cash prices.”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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