WTI Crude at - US$37 per barrel: What does it mean?

April 20, 2020, apart from the triple “20” in such date that will only happen once in our lifetime, is certainly a date that is historic and unforgettable. This is the day when future deliveries (actually, May deliveries) of West Texas Intermediate crude were selling at negative US$37 per barrel, the first time in history. Surprisingly though, Brent crude was still selling at US$26 per barrel when supposedly they always relate with each other. 

Though the price bounced back the following day, still, we have to understand why it happened. A negative price simply means that the seller shall pay the buyer the cost of withdrawing oil from its storages. 

This happens because the storages of suppliers or producersare overflowing. They no longer have available storage tanks. In fact, they’ve even stored some of their produced in oil tankers (cargo vessels) and, of course, paid for it. 

For the oil producing countries, this is quite sad. To recall, in 2008, the beginning of the global recession (financial crisis driven)that lasted until 2009, we saw the rise of oil prices to almost US$150.00 per barrel in July and witnessed its plummeting to US$37.00 per barrel towards the end of the year. 

Consider it a coincidence that the prices per barrel looked the same. In 2008, however, it was a positive, not a negative. The price decline then was never difficult to comprehend. It was primarily due to a sizeable drop in the demand for oil globally, especially, the USA.

The same can be said of the present (health crisis driven). However, it is not just that, the demand for oil declined. As some pundits would say, the “demand didn’t destruct, it disappeared.” Apparently, we all know and are experiencing the primary reason for its disappearance, COVID-19.

Yes, we are experiencing it. Remember, except for a few notorious citizens who have helped undermine the welfare of our health care professionals and other front-liners and drain our meager resources, we have heeded our authorities’ pronouncements. So, we stay at home (rightly so, by the way). Our respective communities are on a lockdown.

Therefore, we don’t have any productive activities. Simply put (except for a few essential businesses), since most of us are not reporting for work or are immobilized, stores and offices, as well as, plants and factories are closed. Consequently, therefore, the demand for non-essential products and services have disappeared.   

So that, in its recent publication of the World Economic Outlook, the International Monetary Fund (IMF) reported that “as a result of the pandemic, the global economy is projected to contract sharply by –3 percent in 2020, much worse than during the 2008–09 financial crisis.”  It further said that, “in a baseline scenario, which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound, the global economy is projected to grow by 5.8 percent in 2021 as economic activity normalizes, helped by policy support.” 

Moreover, the IMF also projected that the economy in the ASEAN-5 (consisting of Indonesia, Malaysia, Philippines, Thailand and Vietnam) is to contract by -0.6 percent in 2020 and is set to expand by 7.8 percent in 2021.

The IMF admitted though that “there is extreme uncertainty around the global growth forecast.” It further said, that it will only depend on how the virus behave onwards and when the cure and the vaccine will be available. More importantly, how the countries will respond through their monetary and fiscal policies.

In the meantime, however, while we are trying to hope for the best, we need to prepare for the worse. To most of us, struggling Filipinos, who have been so bitter about the lockdown and quarantine, we need to understand all possibilities that we may face squarely in the near future. 

Yes, prices of commodities (both essential and non-essential products) might be very low (or deflationary). However, this development should not all make us happy. This may not be just bad news but could be worse to some extent.

Why? When demand(for non-essential) starts to fall, yes, prices will likewise drop. It shall drop to a point where manufacturing companies might find their production costs higher than the selling prices. Therefore, factories will have no other alternative but to cut back on production or temporarily close. Consequently, unemployment rate rises. As the list of unemployed individuals rise, even the demand for consumer or essential products will certainly decline.

Therefore, we shall even find some manufacturers of essential commodities cutting their production targets. In doing so, they shall close some of their plants or factories for a longer period (even after COVID19 is gone). Thus, fire some employees.