Oil Drops Below $0, Signaling Extreme Collapse In Demand


April 20, 2020 4:16 pm

The extraordinary decline in economic activity around the world pushed the May delivery price of West Texas Intermediate crude into negative territory Monday, a never-before-seen scenario that implies that oil producers would have to pay buyers to take a barrel of oil off their hands.

It’s mostly theoretical, though, because the world has a huge glut of oil, there’s hardly anywhere to put additional barrels, and nobody is buying.

Monday’s sudden collapse in the cost of a barrel is mostly owing to the mechanics of the futures market, which closes for May delivery on Tuesday.

The June futures price for West Texas Intermediate (WTI) was hovering around $20 a barrel Monday, about where it has been in recent weeks. That is still down heavily from where it was before the coronavirus pandemic largely shuttered the world economy.

Unless that falls further – a possibility – the negative price of a barrel of oil recorded on Monday shouldn’t affect the cost of energy for business and consumers.

Analysts with S&P Global Platts, a commodities analysis firm, called the price movement a short-term anomaly.

Nonetheless, the notion that a barrel of oil was worth less than zero was a shock to many.

Nothing like this happened in the worst of the Depression, or in the early years of the Civil War, the two previous low points for petroleum, according to Bob McNally, head of the Rapidan Energy Group.

The cause is the world’s glut of oil, mixed with a fall in demand of between 25% and 30%. As oil-producing nations kept pumping through March and into early April, storage capacity neared the brink – and what little is left has already been tied down with leases. There are fewer places to put additional oil.

A Saudi-Russian price war was somewhat resolved April 12, when both sides together with the other main countries in OPEC agreed to cut production by a purported 10 million barrels a day, or about 10% of global output. But that still is less than the decline in consumption, and stocks have continued to grow.

“This moment is of course historical, and could not better illustrate the price-utopia that the market has been in since March, when the full scale of the oversupply problem started to become evident but the market remained oblivious,” wrote Louise Dickson, of Rystad Energy, in a note. “Since then traders have sent prices up and down on speculation, hopes, tweets and wishful thinking. But now reality is sinking in.”

Canadian oil companies, which were not parties to the OPEC-Russia agreement, have started to shut down the wells in the sand tar regions of Alberta. There, too, oil was trading in negative amounts Monday.

“Shutting in production is a very painful decision for an operator to make – often the economics support running a well at a loss for a certain period of time rather than shutting down the project completely,” said Teodora Cowie, a Rystad Energy oil analyst. “But with infrastructure constraints, this is no longer an option for many landlocked producers.”

“The market is starting the painful process of balancing supply against a smaller demand outlook of about 70 million bpd [barrels per day],” wrote Reid Morrison, an energy analyst with PwC. “The economic situation is locked up with no real clarity about what lies ahead, so there’s no reason to expect demand to increase over the near term.”

(c) 2020, The Washington Post · Will Englund 


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