April 2020 saw unprecedented movement of oil prices, with the benchmark US WTI futures price in particular entering uncharted territory when it went into negative territory on the eve of the close of the May delivery contracts. The unprecedented collapse in oil prices was caused primarily by a huge drop in demand for petroleum products, with the implementation of lock-down measures across major markets and the collapse of global air travel. The brief oil price war, primarily between Saudi Arabia and Russia, launched in March 2020 and brought to an end in April 2020, exacerbated this situation.
The demand destruction has been unprecedented. Energy research firm, Rystad Energy suggested in its latest COVID-19 impact on the energy sector report, that global oil demand in 2020 may contract by 6.4% from 2019 and global oil demand may contract by over 22 million bpd in April. The company said that ‘We now estimate 2.5 billion barrels lower oil demand in 2020 due to the virus outbreak, with the average daily demand of 93.5 million bpd for the year, i.e., a 6.4% contraction vs the 2019 level of 100 million bpd’.
Rystad however sees a more prolonged impact through the year with an average demand of only 91.4 million bpd. A large part of the global population is currently working from home, drastically reducing fuel demand for road transport. Jet fuel use is also dropping sharply as 80% of international long-haul flights are cancelled.
WTI prices in April were driven primarily by massive declines in US demand for gasoline, with few people driving due to stay at home orders. This has led to storage levels nearing capacity and nobody wanting to take physical delivery of oil, hence the negative futures contracts.
Brent oil prices, that are more reflective of most internationally trade crudes, have also shown huge declines in prices in April though not entering the same negative territory. Trinidad crudes are typically linked to Brent prices, the Paria traded Molo crude (primarily produced by Heritage) usually trading below Brent while the other Trinidad crudes, Galeota and Calypso, typically trade at par or slightly over Brent. With the massive declines in Brent prices, Heritage has announced that it will store its production over the next couple of months and look to sell once prices have recovered.