Oil prices dip below zero as producers forced to
pay to dispose of excess
US crude fell to negative value for first time in
history as stockpiles overwhelmed storage facilities, before rebounding to just
over $1 on Tuesday
Jillian
Ambrose
Mon 20 Apr
2020 19.26 BSTFirst published on Mon 20 Apr 2020 06.23 BST
US oil
prices turned negative for the first time on record on Monday after oil
producers ran out of space to store the oversupply of crude left by the
coronavirus crisis, triggering an historic market collapse which left oil
traders reeling.
The price
of US crude oil crashed from $18 a barrel to -$38 in a matter of hours, as
rising stockpiles of crude threatened to overwhelm storage facilities and
forcedoil producers to pay buyers to take the barrels they could not store.
The market
crash underlined the impact of the coronavirus outbreak on oil demand as the
global economy slumps.
On Tuesday
prices rebounded above above zero, with the US benchmark West Texas
Intermediate for May changing hands at $1.10 a barrel after closing at -$37.63
in New York on Monday.
The rapid
market decline of recent weeks had reached fever pitch on Monday as traders
reached their last day to trade oil for delivery in May before the contracts
expire. The deadline triggered a collapse in prices as desperate oil traders
with more crude than storage space were forced to take action.
Daniel
Yergin, a Pulitzer-winning oil historian, said: “The May crude oil contract is
going out not with a whimper, but a primal scream.”
The price
of oil from the US shale heartlands has been declining steadily in recent weeks
following the biggest slump in oil demand for 25 years steps due to
restrictions on travel to curb the spread of Covid-19. The fall accelerated
amid rising fears that the global economy may be facing its deepest downturn
since the Great Depression.
Oil
producers have continued to pump near-record levels of crude into the global
market even as analysts warned that the impact of the coronavirus outbreak
would drive oil demand to its lowest levels since 1995. The emergence of
negative oil prices is expected to prompt some oil companies to hasten the
shutdown of their rigs and oil wells to avoid plunging deeper into debt or
bankruptcy.
The
collapse will come as a blow to US President Donald Trump who took credit for
brokering a historic deal between the Opec oil cartel and the world’s largest
oil producing nations to limit the flood of oil production into the market. The
pact to cut between 10 million and 20 million barrels of oil from the market
from next month was dismissed by many within the market as “too little, too
late” to avoid a market crash.
At his
daily White House briefing, Trump described the negative price as a “short-term
problem”. He said the US was filling up its strategic reserves: “If we could
buy it for nothing, we’re gonna take everything we can get,” he said.
The
Guardian reported over the weekend that a record 160m barrels of oil was being
stored in “supergiant” oil tankers outside the world’s largest shipping ports,
including in the US Gulf. The last time floating storage reached levels close
to this was in the depths of the financial crisis in 2009, when traders stored
more than 100m barrels at sea before offloading stocks when the economy began
to recover.
Historically
weak oil markets are likely to bring lower prices for drivers at service
station forecourts, but the price collapse will also hurt pension savings which
are often invested in major oil companies through funds which track equity
markets. The oil price crisis has already wiped billions from the market value
of the largest oil companies, many of which will not be able to pay dividends
if the market rout drags on.
Brett
Fleishman, from climate campaign group at 350.org, said the collapse of oil
prices is “another powerful example of how fossil fuels are too volatile to be
the basis of a resilient economy”.
“We are
experiencing an unparalleled upending in our economies. And it is time for the
fossil fuel industry to recognize that, from now on, the cheapest and best
place to store oil is in the ground,” he said.
“While this
recession shows us that we desperately need sustainable, resilient, and stable
economic systems, based on renewable, accessible and just energy sources, the
fossil fuel industry is not only trying to profit off of the current chaos, but
continues to drive us further into climate breakdown,” Fleishman added.
Oil prices
began to rise again on Tuesday as oil traders turn their attention to trading
oil for delivery in June.
The US oil
market - known in the industry as the West Texas Intermediate price - is
expected to trade above $20 a barrel this week, recovering from its slump into
negative territory. The international oil price benchmark, known as Brent
crude, is trading at around $26 a barrel.
The
recovery is expected to pick up over the second half of the year as tight
restrictions on travel to help curb the spread of the virus are lifted, raising
demand for fuels and oil. At the same time supply is expected to dwindle due to
the historic deal to limit oil production and the financial collapse of weaker
oil companies.
However,
most analysts believe that oil prices will fail to reach the same price levels
recorded at the beginning of the year before the outbreak. Brent crude reached
highs of almost $69 a barrel in January before plummeting to less than $23 a
barrel at the end of March. Many market experts predict the price of Brent will
remain below $50 a barrel this year.
U.S. COVID-19OIL PRICES WON'T BE NEGATIVE
FOREVER. BUT THE OIL INDUSTRY WILL NEVER BE THE SAME
Oil Prices Won't Be Negative Forever. But the Oil
Industry Will Never Be the Same
Trump Announces U.S. Will Add 75 Million Barrels of
Oil to Reserve
President Trump said the United States will purchase
as much as 75 million barrels of oil and put it into the strategic reserve for
the first time in decades
BY JUSTIN
WORLAND
APRIL 20, 2020
From its
dusty origins more than a century ago, the mythic story of the American oil
industry has been one of pioneering entrepreneurs searching far and wide for
black gold and becoming immensely rich when they found it. Today, with the U.S.
benchmark price for crude oil entering negative territory for the first time in
history, a wildcatter who struck oil couldn’t give it away without paying
someone to take it.
The
coronavirus pandemic has shocked the oil industry, flooding companies with more
supply than the world can burn and bankrupting small players. The damage has
only just begun. “In a few years’ time, when we look back on 2020, we may well
see that it was the worst year in the history of global oil markets,” said
Fatih Birol, the head of the International Energy Agency (IEA), on a call with
journalists. “April may well have been the worst month. It may go down as Black
April in the history of the oil industry.”
However
ugly the view backwards is at that point, what remains will look very different
too. Many players will have restructured or disappeared. The companies that
survive will likely face reduced political power and need to grapple more
urgently with the reality of climate change. That will be a sea change. For as
long as almost anyone roaming the planet today has been alive, oil has powered
our lives and shaped our politics and way of life.
The origin
of this industry crisis is as simple as it is dramatic. As the coronavirus
pandemic has kept people at home and ground factories to a halt, demand for oil
in April dropped by nearly a third compared with the same month last year,
according to the IEA. At the same time, Russia broke off negotiations to stem
drilling with Saudi Arabia and its OPEC+ partners. Instead, the two countries,
some of the world’s biggest oil exporters, launched a price war, ramping up
production and cutting prices in hopes of grabbing more market share. They
agreed to halt market hostilities last week, but not before filling the world’s
storage facilities with crude. “This is a double whammy for people in the oil
and gas industry,” said Texas Senator John Cornyn, a Republican, on a call for
members of the Greater Houston Partnership, which promotes the city’s industry.
In Texas,
the heart of the American oil industry, producers have run out of places to
store what they pull out of the ground. With refiners buying far less oil to
turn into fuel and no place to store the product, oil traded at a negative
price for the first time on April 20, leaving companies paying for others to
take it off their hands. At one point on April 20, the U.S. benchmark price hit
negative $40 per barrel. The negative price is slightly less dramatic than it
seems because it only applies to contracts for oil delivered in May, but at $20
per barrel the June prices are far below the $50 per barrel range at which new
wells typically turn a profit in West Texas.
The crash
won’t hurt everyone equally. Smaller players are already struggling to survive,
many of them deeply indebted after years of producing oil at a loss. Analysts
estimate that hundreds of small firms could go bankrupt even with prices at $20
per barrel. At the same time, bigger players may emerge with greater market
share and, they hope, greater profitability as some of their fiercest
competitors disappear. “Current low prices will force some companies out of
business,” says Mark Haefele, chief investment officer of UBS, in a research
note, “But we are also convinced that the global oil industry will survive this
crisis.”
Those
disparate interests are playing out in Washington, D.C. Smaller companies have
pleaded with government officials for help. Harold Hamm, founder of independent
producer Continental Resources which has lost 70% of its value this year,
called the White House in March asking the government to help the industry. The
CEO of Pioneer Natural Resources, another independent oil company which has
lost 50% of its value since January, called on Texas regulators to mandate that
companies reduce production, saying the oil industry would have the same fate
as coal without action.
At the same
time, the oil majors have lobbied for the government to stay out of it, arguing
that the market should be allowed to run its course. With bigger capital
buffers, the bigger oil companies can wait the crisis out, buying up profitable
oil wells on the cheap. Analysts say that West Texas shale oil, which in recent
years has made the U.S. the world’s largest oil producer and is produced by
fracking, will likely come back relatively quickly when demand returns. Oil
majors “were not looking for a bailout, didn’t want the president to do import
tariffs and didn’t want quotas,” says Goldwyn, adding that they argue letting
the market decide is “the American way.”
Still, the
firms that survive will face a series of big challenges. Returning to where
they started this year isn’t necessarily a win. Energy was the worst performing
sector on the S&P 500 stock index last year, and investors have
increasingly looked at the industry with skepticism as consumers and
policymakers face the reality of climate change. “The basic model is in pieces,
it’s fallen apart,” says Tom Sanzillo, director of finance at the Institute for
Energy Economics and Financial Analysis (IEEFA). “This is an industry in last
place.”
In recent
years, the oil industry has crept slowly toward an existential challenge
everyone knew was coming with a growing crop of analysts predicting that demand
for oil would flatline sometime in the coming decades before declining.
Coronavirus has made those concerns even more urgent for the industry. While
the world economy will continue to burn oil after the coronavirus pandemic
fades, some analysts now say that the world may never consume as much of the
commodity as it did last year. The companies that survive will need to figure
out a game plan to manage that change, either by investing in cleaner energy
sources or winding down their assets.
Either way,
it looks like the age of the mythic American wildcatter is gone for good.
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