Believe it or not, crude oil prices have gone down to negative. The West Texas Intermediate (WTI) futures, the benchmark for US oil, fell as low as negative USD 37 a barrel today.
In other words, the excess capacity is oil supply is now so bad that not only is nobody buying oil in the US, but oil producers are now paying buyers to take crude oil away from them.
Elsewhere, the situation isn’t as bad. Europe’s Brent crude oil index is still trading at around USD 25, but it’s down nine percent from the previous month.
Demand for oil has collapsed following the Covid-19 pandemic, which has caused a significant slowdown in economic activities as countries around are in a lockdown.
Crude oil is traded in futures and currently, the world is at its limit in crude oil storage capacity and oil traders need to offload their existing contracts, which will take months to clear, before they can commit themselves to buying more futures contracts.
Earlier this month, the OPEC cartel of oil producing nations have together with Russia have agreed cut output by about 10 percent, the largest cut in the modern history.
The slump in crude oil prices will have a direct impact on Malaysia, as our country is heavily reliant on crude oil exports. In fact, our National Budget is balanced on the assumption that crude oil prices average at USD 62 per barrel.
Malaysian uses a different Tapis Crude Oil index. It’s traded in Singapore, currently at around USD 27 per barrel, still way below the USD 62 per barrel target.