Brent crude prices dropped to a 21-year low on Wednesday as oil markets crashed further in response to plunging demand since the coronavirus pandemic began.
The international benchmark extended Tuesday’s 24 per cent drop, taking the price to $15.97 per barrel — its lowest level since June 1999.
America’s main oil price, West Texas Intermediate (WTI) — was down more than 4 per cent at $11.06 a barrel.
How might this affect consumers?
American prices are unlikely to affect UK drivers but some of the fall in Brent crude may be passed on to UK forecourts. Drivers have enjoyed falling fuel prices for 12 consecutive weeks, according to government figures published on Tuesday.
The average price of petrol at UK forecourts is £1.09 per litre, the lowest since May 2016. Diesel is down to £1.16 per litre, on average, the cheapest since July 2017.
However, changes in the oil market take several weeks to filter through to retail prices and much of the cost of fuel is made up by taxes and other production and distribution costs.
With billions of people at home and making fewer journeys, many households are unlikely to feel a significant benefit.
Prices of other goods are falling, the latest official figures released on Wednesday show. Overall Consumer Price Inflation dropped to 1.5 per cent from 1.7 per cent, largely thanks to lower fuel and clothing costs.
Retailers discounted fashion ranges before the lockdown as the number of shoppers fell. Many have been left with piles of summer clothes that risk going unsold. Primark said on Tuesday that it had about £2bn of stock sitting in warehouses and on shelves. The discount chain wrote off £248m for spring-summer ranges that have no buyers, as it revealed that sales had dropped from £650m per month to zero.
What next for oil?
Demand for oil has plunged by around 30 per cent in a matter of weeks as large sections of the economy remain in hibernation to slow the spread of coronavirus.
Turning oil supplies off and on has cost implications, meaning producers have continued to pump out more crude.
That has quickly overwhelmed storage capacity, most notably in the US. Crude prices in the US, where most oil wells are inland, went negative on Monday for the first time in history, meaning buyers were being paid to take delivery of oil, fearing they would have nowhere to store it.
Brent crude, which is priced close to the North Sea, had been insulated to some degree from the historic price falls in US oil markets because it is not facing the same restrictions to capacity. Offshore producers and those close to the sea have access to more storage.
But analysts have warned that seaborne oil tankers are filling up, albeit slower than the inland facilities.
Significant oversupply remains a problem, sending prices towards zero and even lower in some cases. Producers will soon have to start shutting down wells and cutting output.
Matt Adams, portfolio manager at Franklin Equity, said negative benchmark prices were partly due to technical quirks of the oil market and real prices on the ground were positive, but still below $10 a barrel in the US.
“It’s important to remember that energy markets are largely self-correcting, and the lower prices go the faster wells are shut-in and drilling activity should decline,” he said.
“We believe at these price levels that all oil production is uneconomic, even from the lowest cost producers.”
It will take a sustained period of higher economic activity to increase demand and get oil out of its current slump, Mr Adams said.
Neil Wilson, chief market analyst at Markets.com, warned Brent crude prices could even hit zero if the slump worsens.
He said: “If global storage is running out — and that is what the Brent trade is starting to suggest — then there will be no bid and prices could hit zero.”
