By Isaac Cohen*
The agreement reached last week between Russia, Saudi Arabia and the United States, to cut production by almost 10 million barrels per day (bpd), generated great expectations that it would stabilize oil prices. Last Monday, the market denied that expectation when oil price futures in the United States fell into negative territory, for the first time in history. Responding to a supply glut and a collapse in demand caused by the pandemic, West Texas Intermediate May futures, the benchmark for United States oil prices, last Monday fell $55.90, equivalent to a 306 percent decline, ending the day at negative $37.63 per barrel. This is the stunning impact of the collapse in demand caused by the shutdown of global economic activity, required to stop the spread of the coronavirus. In normal times, 60 percent of the global oil demand of 100 million bpd is for transportation, but few persons are driving and less airplanes are flying, which has caused total demand for fuel to fall to between 65 and 70 million bpd.
Observers have sought in vain for precedents of a comparable precipitous crumbling in oil demand and prices. For instance, the last major fall in oil prices took four years, between 1979 and 1983. This time, the fall has taken only four weeks and the capacity to store the excess supply is close to exhausted. For example, Saudi Arabia has leased 24 supertankers in Singapore, to store some of the excess production generated after it failed to agree on production cuts with Russia.
*International analyst and consultant, former Director ECLAC Washington. Commentator on economic and financial issues for CNN en Español TV and radio, TELEMUNDO and UNVISION and other media.
