Could Oil Prices Go Negative? Prices Continue To Drop Due To Lack Of Demand Amid Coronavirus Outbreak

Oil prices could possibly go negative, some analysts say, due to lack of demand amid the ongoing coronavirus pandemic and increased production due to a price war between Russia and Saudi Arabia.

Paul Sankey, managing director at Mizuho Securities, told Fox Business earlier this month that oil companies might not be able to store all the oil that is being produced, and would pay buyers to take the commodity of their hands.

The effect of negative oil prices would hurt the U.S. shale industry. President Trump instructed the Department of Energy to purchase oil for the nation’s reserves earlier this month but the U.S. government is still trying to determine how to finance the purchasing operation.

The coronavirus has caused demand for oil to drop, as countries around the world have shut down non-essential businesses to prevent the spread of the disease. Saudi Arabia has urged Russia to cut production due to the drop in demand but Russia refused. Both countries have been increasing production of oil in a race for market share.

Analysts at Goldman Sachs, however, have said that coronavirus is the bigger challenge for the oil industry, rather than the Russia-Saudi price war.

“Big Oil will consolidate the best assets in the industry and will shed the worst ... when the industry emerges from this downturn, there will be fewer companies of higher asset quality, but the capital constraints will remain,” the analysts wrote in a note on Monday.

“The oil price war is made irrelevant by the large decline in demand and has made a coordinated supply response impossible to achieve in time,” the note continued.

Oil is just one of the many struggling industries that may contribute to global economic fears. The coronavirus pandemic will likely cause a global recession, as cases continue to rise in major economies such as the U.S., Italy and Japan.