OPINION At one level the answer is simple arithmetic, maths that eluded Trump and “OPEC+” when they thought their agreement would halt the dive in oil prices. At another it is more complex and relates to oil as a vehicle for pure speculation.
At one level the answer is simple arithmetic, maths that eluded Trump and “OPEC+” when they thought their agreement would halt the dive in oil prices from around $US60 a barrel in February, before the severity of the coronavirus pandemic became obvious, to below $US23 a barrel ahead of Trump’s deal.
Both committed to increasing production just as the impact of the coronavirus on demand for oil began to really show up. That’s the backdrop – a massive and increasing global glut of oil – that confronted the financial players in the oil futures market. The market isn’t a purely financial one. It is backed by the physical commodity. There are those who are buyers and sellers of the physical commodity who use the market to lock in its price and who plan to take or make physical delivery of the commodity in future.
There is no quick fix for the glut. Reducing oil production isn’t as easy as turning off a tap – it takes time, and there are costs, associated with cutting production.For the US shale sector, current prices mean a wave of bankruptcies and defaults in the US junk market and inevitable consolidation led by the bigger producers.
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