United States oil futures turned negative for the first time in history on Monday with traders dumping May contracts as analysts warn that crude storage will fill to the brim by next month, and US shale firms weigh the real possibility of shutting down production.
US benchmark West Texas Intermediate (WTI) crude for May delivery crashed more than 300 percent on Monday, deep into negative territory, touching -$40.32 before clawing back to settle at -$37.63.
The speed and swiftness of the May contract’s death spiral took even seasoned oil veterans by surprise.
Can the world’s top oil producers save a crashing market?
Is a government bailout of US shale oil still in the cards?
Will coronavirus get the better of OPEC and its allies?
“Wow. 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.”
By turning negative, prices are signalling that traders are actually paying to have oil taken off their hands.
“WTI doesn’t have anywhere to go,” Louise Dickson, oil markets analyst at Rystad Energy, told Al Jazeera. “Traders have had a whole month to sit on this oil and decide what to do with it, and today is the last day they could sell it.”
April 21 is the last day to trade May 2020 WTI on the New York Mercantile Exchange (NYMEX). And US shale oil finds itself in a major bind with limited storage options.
WTI for June delivery was holding above $21 a barrel on Monday.
Brent crude, the global benchmark for oil, is trading around $26 a barrel, having plummeted by as much as 70 percent since the start of January as coronavirus lockdowns have destroyed global demand in crude.
The US Energy Information Administration last week reported a record 19.3 million-barrel crude stock build. There is currently a remaining 21 million barrels of storage available at the Cushing hub in Cushing, Oklahoma.
But that will fill up to the brim by mid-to-late May, Rystad Energy predicts.
The tsunami of supply has battered the US shale market, where many firms need crude to fetch between $48 and $54 a barrel to break even, according to the Federal Reserve Bank of Dallas.
Oil prices were already weighed down by oversupply going into 2020, and were further pressured by coronavirus containment measures that have obliterated demand. But crude prices went into free fall last month after Saudi Arabia initiated an oil price war in retaliation for Russia not agreeing to deep output cuts to offset the blow from COVID-19 disruptions.
With US shale oil producers getting hammered by the oil price war, US President Donald Trump appealed directly to Saudi Arabia’s de facto leader, Crown Prince Mohammad bin Salman and Russian President Vladimir Putin to set aside their differences and stabilize oil markets.
Those efforts culminated in an 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.
But oil market analysts say even those record-breaking curbs are simply not enough to salvage a market in unprecedented distress.
Even before the OPEC+ deal struck among the top oil producers earlier, analysts anticipated storage to run out in mid-May. Now, compliance with that deal is proving to be a big challenge.
Dickson said oil filling up in May is tantamount to a “doomsday” scenario, adding: “Countries had 15 days to cut 9.7 million barrels in production. It’s not a realistic amount of oil to cut.”
Now, hundreds, maybe thousands, of producers in the Permian Basin in the southwestern US are at risk of shutting down production as oil storage tanks at the Cushing near capacity.
“When Cushing 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,” Dickson said.
Some companies would rather lose a lot of money in the short term, rather than close an oil well because a shut-in is extremely expensive. Still, Rystad predicts more shut-ins to come in Wyoming, Colorado, and North Dakota, which already announced a 170,000-barrels-per-day shut-in back in March.
“Market prices are showing that oil is all but worthless now,” said Jim Krane, a fellow in energy studies at Rice University’s Baker Institute for Public Policy. “It’s going to take a long time to draw down the huge supply overhang,” he told Al Jazeera.
There are some creative measures that could provide a modicum of relief, say analysts. Producers can work with midstream companies to move shale to the Gulf Coast and store it offshore. But Dickson says that there can only be so many tankers in the Gulf, and offshore storage can get quite expensive.
Another possible workaround is to buy crude stockpiles for the US’s Strategic Petroleum Reserve. But instead of physically transporting the oil, the US government could pay the producer to store oil in the ground – effectively creating a remote strategic reserve.
“This helps the administration save the shale players and accomplishes two good things: getting supply off the market and giving shale some money, and US government buying oil at a market discount,” said Dickson.
“We already see a bit of a correction in the June contract, but traders have another month or so to dump these holdings,” she added. “And right now, I think there is a ‘wait and see attitude’ from traders to see if the OPEC+ cuts result in any meaningful supply relief.”
Oil price crash alters priorities, greases skids to new world order
The sustained plunge in global oil prices has brought deep, unexpected shifts on the geopolitical landscape, with impacts felt in the Arctic and the Middle East, and in the fortunes of the American heartland and the future of the Russian-Chinese strategic alliance. A U.S.-engineered market truce has helped energy prices rebound slightly this month after…
The sustained plunge in global oil prices has brought deep, unexpected shifts on the geopolitical landscape, with impacts felt in the Arctic and the Middle East, and in the fortunes of the American heartland and the future of the Russian-Chinese strategic alliance.
A U.S.-engineered market truce has helped energy prices rebound slightly this month after flatlining in April, but analysts say reverberations will likely be felt for years to come as they chip away at the foundational international partnerships in the post-World War II era and create new alliances and rivalries.
Analysts say there is no way the U.S. and its international position will avoid alterations from the oil markets, no matter who sits in the White House the next four years.
The Trump administration’s public pressure on Saudi Arabia this spring to slash oil production sparked tensions with Riyadh that reportedly led to the White House’s decision this month to pull American Patriot missile systems from the kingdom.
The health of the U.S.-Saudi alliance looms large in national security circles. In recent years, U.S. officials sought Saudi support for the administration’s Israeli-Palestinian peace plan and help with the mutual goal of containing Iran.
But America’s own ambitions to be a global energy player, built on a fracking production revolution that all but ended Washington’s dependence on foreign suppliers, could take a major hit if oil prices stay below $50 a barrel indefinitely.
The U.S. could well find itself on the outside looking in as green energy gains momentum and depresses demand for American shale oil. Such an outcome could further strain the relationship between the U.S. and key European allies such as Germany and France, which have largely stuck by an Obama-era emissions reduction deal that President Trump abandoned long before the oil price plummet and COVID-19 pandemic took hold.
For Russia, meanwhile, a yearslong strategy to deepen its footprint and exploit vast energy resources in the Arctic could fall flat if prices remain low. A frustrated Moscow could respond to the energy crisis in a number of ways, specialists say, perhaps by seeking to expand its influence in Eastern Europe or retreating from conflicts in Libya and Syria.
At the same time, the growing alliance between Russia and China has shown signs of more strength as Russia this week overtook Saudi Arabia as the No. 1 supplier of foreign fuel to China.
Specialists warn of more immediate, deadly consequences.
Incidents such as last year’s attack on Saudi oil facilities, which the Trump administration blames on Iran and its proxies, could become more frequent as oil-rich nations turn to violence to cripple competitors and preserve their place in the remade energy landscape.
“The ongoing struggles for revenue in oil-dependent economies could lead to more regional unrest with incentives to damage one another’s oil-producing capacity,” Marie N. Fagan, chief economist with London Economics International LLC, told reporters on a conference call this week.
More broadly, specialists say, the relative stability of oil markets and the subsequent ties that helped keep the global economy together for decades are facing new pressures.
“As nations come under unprecedented economic and political strains in light of the pandemic, important bilateral relationships that underpinned oil market stability are now realigning,” Amy M. Jaffe, a senior fellow for energy and the environment at the Council on Foreign Relations, wrote in a recent blog post.
“This realignment is creating new geopolitical uncertainties at a time when stronger bilateral and multilateral relations are required.”
The Russia question
Oil prices have crept up in recent weeks after dipping below $20 per barrel last month as economies shut down to contain the COVID-19 outbreak and global travel ground to a near halt. At one point, demand was so low and supply so glutted that oil future prices briefly dipped below zero.
But prices remain at historically low levels. The international benchmark Brent Crude price stuck at roughly $35 a barrel Thursday, and the key U.S. WTI Crude price failed to crest at $34.
Coupled with COVID-19 social distancing shutdowns of factories and airlines, the dramatic price fall has crippled economies around the world but has hit major oil producers such as Russia especially hard. Given the uncertainty of world oil markets, specialists say, the crisis could fundamentally reshape President Vladimir Putin’s foreign policy.
The International Monetary Fund estimates that Russia loses money on oil exports any time global crude dips below $40 a barrel. With current prices hovering barely above $30, many are questioning how Mr. Putin will continue to underwrite his provocative military adventurism in Ukraine, the Middle East and beyond.
William Taylor, a longtime U.S. diplomat and former ambassador to Ukraine, told The Washington Times in a recent interview that Mr. Putin “may have no choice but to rein in some of Russia’s malign activities around the world.”
“It is possible that all these storms combined — the economic, political, financial and health crises — mean he may need to pull back from the adventures in Ukraine, Syria, Libya and Venezuela,” said Mr. Taylor, now with the U.S. Institute of Peace.
Others say Mr. Putin’s grand plan to dominate the Arctic in an age of rising global temperatures could crumble. The Russian leader has said he intends to transform the icy waters of the Arctic into a key commercial corridor with portions largely under Russian control.
Moscow also has undertaken massive energy exploration efforts in the region in the hopes of using the money generated there to keep its economy afloat and fund its foreign policy adventures.
A sustained oil price drop could scramble that strategy.
“We are in a sustained period of economic recession. I am almost worried about Russia’s policy in the Arctic failing and what that means,” Heather Conley, senior vice president for Europe, Eurasia and the Arctic at the Center for Strategic and International Studies, said in a recent interview.
“You have to have the energy prices and global commodity prices to sustain” Russia’s Arctic strategy, she said. “If you don’t, no matter how much you can push it, it’s not going to develop.”
Others have argued that the uncertainty surrounding Russia could ultimately give Washington and its allies a rare strategic window to undercut Moscow’s vexing meddling in certain theaters.
Reshuffling the deck
For all of the negative impacts on Russia, the COVID-19 pandemic and subsequent oil crisis seem to be deepening Moscow’s willingness to align with China rhetorically and strategically.
Russian Foreign Minister Sergey Lavrov, in sharp contrast to Washington and U.S. allies, has heaped praise on China over its response to the pandemic.
Although Russia has viewed China as a potential threat more than a partner in recent decades, U.S. officials say, it has recently coordinated at unprecedented levels with Beijing’s attempts to spread disinformation pinning blame for the pandemic that first emerged in Wuhan, China, on the United States.
Beyond rhetoric and propaganda, there is oil, and Russian exports to China in April were roughly 18% higher than a year earlier. That means Russia has surpassed Saudi Arabia as China’s top crude oil supplier.
Contrary to any hope of getting Russia to “turn to the West to face the threat of China, we’re seeing the opposite dynamic unfolding at the moment,” said Anna Borshchevskaya, a Washington Institute fellow focused on Russia.
Ms. Borshchevskaya said in an interview that “the pandemic has shown Russia and China moving closer together, not just in terms of countering the disease but in terms of strategic rhetoric against Washington.”
But other analysts say that banking on China to be a top customer could prove foolish in a post-COVID world.
“For oil producers, especially the Arab OPEC producers and Russia, relying on China to consume a majority of their future production is a dangerous game,” longtime oil analyst Cyril Widdershoven wrote in a recent piece for OilPrice.com.
“Just as U.S. shale is far too heavily reliant on Cushing storage and paid the price when WTI prices crashed into negative territory as Cushing hit capacity, Arab producers have been hit hard by Chinese demand destruction,” he said.
The Trump administration faces a major decision on whether to loosen U.S. ties with producers such as the Saudis or help them navigate the new market landscape.
Longtime Saudi Arabia expert F. Gregory Gause said the relationship was never based on Saudi oil flowing to the United States in exchange for American security for Riyadh.
“I think the American view of this was always that Saudi Arabian oil was important for the world economy,” Mr. Gause, who teaches at Texas A&M University, said this week during a webinar hosted by the Quincy Institute for Responsible Statecraft.
“Because it was important for the world economy — it was important for our allies in Europe and Asia,” he said, “the U.S.-Saudi relationship had its foundations before the United States imported a single drop of oil from anywhere.”
Asked whether U.S. and Saudi interests still align the way they did in the post-World War II era, Mr. Gause said the answer depends on whether Washington still views oil as a “strategic commodity.”
“If it is, then does the United States want to have some influence in an area that exports more oil than any others?” he said. “I think that that’s an open question and worth debating.”
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Why did US oil prices crash? And how will it affect me?
Prices of benchmark United States crude turned negative on Monday, dropping as low as -$40.32 per barrel before settling in the negative thirties. And prices fell under pressure again on Tuesday. Why are oil prices crashing? And how could it affect you? Why did US oil prices turn negative? In a word – oversupply. Right…
Prices of benchmark United States crude turned negative on Monday, dropping as low as -$40.32 per barrel before settling in the negative thirties. And prices fell under pressure again on Tuesday.
Why are oil prices crashing? And how could it affect you?
Why did US oil prices turn negative?
In a word – oversupply. Right now there is so much excess crude sloshing around the US and global markets that producers and traders are literally running out of places to store it – both on land in tanks, and even at sea on oil tankers. When prices turn negative, that signals that traders are willing to pay to have oil taken off their hands.
I kept hearing about oil futures? What are those?
Oil trades as so-called “futures contracts” that allow buyers to purchase barrels of oil at a predetermined price for delivery at a predetermined future date. This is a binding agreement that legally requires buyers and sellers to make good on the deal when the contract comes due.
On Monday, the futures contract that obliged buyers to take possession of US benchmark West Texas Intermediate (WTI) crude in May was set to expire the next day. And because traders were worried about where they could possibly store the crude they were obliged to take possession of, they dumped the contracts, sending them into negative territory.
Brutal. Will the same thing happen to WTI that’s set to be delivered in June?
Prices for WTI for June delivery were under pressure on Tuesday, but they hadn’t yet turned negative. But if storage remains an issue, the pressure is unlikely to ease up.
Why is there such a massive glut of crude?
The world was already awash in crude going into this year. Then the coronavirus struck, ushering in containment measures that shut down businesses, closed borders, disrupted international travel and locked down consumers. Those disruptions decimated demand even more. And just when things couldn’t get any worse, Saudi Arabia declared an oil price war.
What is an ‘oil price war’ and why did the Saudis declare one?
The Saudis, who are the de facto leaders of the OPEC oil price fixing cartel, wanted non-OPEC producer Russia to agree to deep production cuts to offset the coronavirus demand hit and buoy prices. When Russia refused to do as the Saudis wanted, Riyadh responded last month by lowering the price it charges for Saudi crude and pumping oil with abandon. That’s when prices really started to nosedive.
But doesn’t that hurt the Saudis too when prices nosedive?
For sure, but not as much as other producers. The Saudis can pump oil more cheaply than any other entity, which gives them a serious advantage if they want to steal market share from higher cost producers. But they can’t weather such low prices indefinitely. The kingdom needs oil to fetch $83 a barrel to balance its budget.
Which producers were hurt the most?
Any country that relies heavily on oil for the lion’s share of its income is getting clobbered right now. So are US shale oil producers, because their cost of production is relatively high. Many US oil producers need crude to fetch between $46 to $54 a barrel to break even, let alone to turn a profit. It doesn’t help that a lot of companies in the US shale patch borrowed big time to drill new wells, which are simply not profitable when prices crash. Which is why President Donald Trump personally got involved in oil markets.
What did Trump do?
He turned relationship counsellor. He called up Saudi Arabia’s de facto leader, Crown Prince Mohammed bin Salman, and Russian President Vladimir Putin, and asked them to call a truce and strike a deal to stabilise oil markets.
Did Trump succeed?
Yes and no. Saudi-led OPEC and its allies did agree to a record production cut of 9.7 million barrels a day. But the markets were hardly impressed because even that historic curb is not enough to counter the blow coronavirus has delivered to demand. So US shale producers are still under the gun. Big time. And running out of room to store all the crude they are producing.
How soon until they run out?
By some esimates, very soon. Rystad Energy analysts reckon the oil storage hub in Cushing, Oklahoma, which is where US oil bought on futures contracts is delivered, could run out of room by mid-to-late May.
Is it just the shale oil corporate big shots and shareholders who get hurt by this?
No. The people who work for those firms could lose their jobs if their firms go under and, as of March, some 156,000 people were employed in the US oil and gas sector. But the damage could spread to businesses that feed from oil and gas extraction. And if these firms go under, that means less tax revenue to fund government programmes.
Remember, your income is my income. My income is your income. That’s how the economy works. We’re all in it together.
What about petrol prices? Will negatively priced oil mean I’ll fill up my tank for free?
No. While the cost of petrol has declined along with demand in the wake of lockdowns, petrol prices aren’t just determined by the price of oil. There are also refining costs, distribution and marketing, as well as taxes that determine what you pay at the pump. Check out this rather engaging graphic produced by the US Energy Information Administration.
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