Due to the coronavirus, there is so much unused oil all over the world that traders would pay to have it taken off their hands.
For the first time in history, United States Oil futures turned negative on Monday, with the US benchmark West Texas Intermediate (WTI) crude falling to -$40.32 before finishing the day on -$37.63. Analysts have warned that crude storage will fill to the brim by the end of next month while shale (effectively rocks that are refined into oil and natural gasses) producers face the distinct possibility of shutting down.
“Prices needed to fall given the rapid decrease in demand and storage filling quickly. But I did not expect them to fall so fast,” Samantha Gross, an energy and climate fellow at the Brookings Institution, told Al Jazeera. “We have never seen companies paying to have their oil taken away. It can’t stay this way for long – it is the market signalling that storage is filling rapidly and that more production isn’t needed.”
And with prices turning negative, it shows that people are actually paying to have oil taken off of their hands. Why? Because once crude storage is full, big industries would have to shut in (close their wells).
“When Cushing [an oil storage in Oklahoma] gets full, the midstream operators will say you cannot buy oil. Then Pioneer, Chevron and the other big companies will have to make the decision to shut in – meaning close a well – or try to sell their oil at an extreme loss,” Louise Dickson, oil markets analyst at Rystad Energy, told Al Jazeera.
April 21 is the last day that to trade May 2020 futures on the New York Mercantile Exchange (NYME), which is why prices plummeted yesterday, with the oversupply of oil likely to cause real problems towards the end of next month. Companies would rather suffer extreme losses than commit to a shut in, because that is extremely expensive, but if they can’t find any willing buyers to store excess oil they may be forced into taking that action.
Another alternative would be to move shale to the gulf coast and store it offshore, but there is still limited space there and offshore storage is expensive. Another alternative is to store the oil in the ground, effectively a strategic reserve, by selling it to the US government’s Strategic Petroleum Reserve.
2020 has been a terrible year for the oil industry, with prices down going into the year due to an oversupply at the end of 2019. Then demand for oil plummeted after containment measures were put into place following the rise of the coronavirus pandemic. However, Saudi Arabia initiating an oil price war with Russia is what truly sent it into free fall. Russia refused to make deep cuts to their output to offset the disruptions caused by COVID-19. However, President Donald Trump was able to serve as a mediator between Crowned Price Mohammed Bin Salman and President Vladimir Putin, culminating in a historic agreement on April 12 between Saudi-led OPEC and its allies led by Russia, a group known as OPEC+, to cut output by 9.7 million barrels per day.
However, those cuts are regarded as unrealistic and, as storage starts to fill to capacity, the oil industry is a ticking time bomb that is set to go off in May.