SINGAPORE (Apr 21): Oil prices — as measured by May Futures of West Texas Intermediate expiring Tuesday afternoon April 21 Texas time — fell well below zero today. Indeed, at one point WTI crude oil for May delivery was selling at minus (that’s not a typo) US$37.63 per barrel. In effect, sellers were paying buyers US$37 per barrel to take their oil away. That was -300% change over Friday, the previous trading day.
Why would anyone actually pay someone to take their oil which was considered a fairly essential, and expensive, commodity not long ago?
Well, for one thing, because the world is now awash with just too much oil. So much that there is no place anywhere to store it. All the oil storage tanks, oil tankers, empty barrel are now full.
Airlines are not taking any delivery of aviation fuel because 80% of world’s commercial aircraft fleet is grounded, gasoline stations where you fill your car with petrol are not taking oil because their own tanks are already full since very few car owners are coming by too fill up. Industrial users of oil, petrochemical firms are not taking any delivery because there is too much inventory of plastic, packaging materials and other petroleum derivatives.
Whenever there is oversupply of any commodity, the best thing to do is to cut production until the supply stabilizes. At the end of December last year, or pre-Coronavirus, the world was consuming just over 90 million barrels of oil per day. The global lockdown in the aftermath of Coronavirus has cut demand by an estimated 30 to 35 million barrels day.
Despite recent cuts by Saudi Arabia and Russia the world has 15 to 20 million barrels daily surplus. Every day there is a need for new storage capacity to store up to 20 million barrels of oil. Land locked oil like Shale depends mainly on pipelines, efficient logistics and more critically, storage.
The world’s biggest oil producer is not Saudi Arabia or any other Middle Eastern country or even Russia. Thanks to rise and rise of Shale oil, America is now No.1 producer.
The problem is that it is more expensive to shut down the American wells producing oil. If you shut down an oil well, there is environmental destruction near that oil well. If you destroy the environment, you need to pay high penalties. The penalties are higher than giving that oil away for free or indeed paying someone to take that oil away from you, thus the negative price of oil.
If there is so much oil that is being given away why doesn’t US Strategic petroleum reserves or SPR take it for free put in it in its storage tanks and sell it when prices recover. While SPR has some spare capacity, you need a pipeline and trucking capacity to get your oil there.
There is now enough spare capacity only for a week and half of US production. So even if it was possible for oil producers to get the oil to tanks (there will be logistic costs) there is only enough capacity for a week of oil.
The bigger picture is that if you shut Shale oil wells that are losing money (that's 90% of them) you have to layoff millions of people directly or indirectly employed by oil and gas sector including in affiliated services. US Oil and gas industry supports 9.8 million jobs or 5.6% of total US employment, according to PwC.
Even if half of those lose their jobs, the government would of have to pay nearly 5 million people. So it is better to keep the oil wells running and keep the people employed rather than help Saudi Arabia, Russia and other oil producers.
Another reason why nobody wants to shut down land wells is that unlike offshore oil wells which are easier to turn off and on, once you shut down a land-based oil well it costs a ton of money to bring it back on stream.
How did we get to negative prices for oil in the futures market? Oil traders say some spectaculars went long, or bullish, on depressed oil prices, betting that Saudi-Russia deal two weeks ago to cut production will be substantive and was more likely to actually work, eventually raising prices.
But as the May futures contract came close to April 21 expiration date, the speculators panicked and rushed to sell since they didn’t want to take delivery of oil they can’t store. That triggered a price collapse as everyone else in the market rushed to sell as well.
Negative oil prices are not a consequence of a war between Saudi Prince Mohamed bin Salman and Russian strongman Vladimir Putin to drive away US Shale producers. While the Saudi-Russian pact may have expedited the process, the reality is that oil prices were headed that way anyway.
Indeed, the Russia-Saudi truce three weeks ago did little to stop plummeting prices of Oil.
The irony is that if oil prices remain low for a few more months, Russians and Saudis would stand to lose as much if not more than some of US Shale producers who will be bailed out by US government.
Assif Shameen is a business and technology writer based in North America
