Oil prices fall to historic lows as West Texas crude futures drop below $0

UGO AMADI with agency report

US main oil prices crashed below zero dollars for the first time in history as a triple threat of record-low demand, oversupply and low storage facilities for crude oil pushed price to its lowest ever Monday.

West Texas Intermediate, the US marker, lost more than 250 percent on Monday to trade as low as -$40.32 a barrel in a day of chaos in oil futures markets, FT reported.

Brent slid almost 10 percent to $25.78 in an apocalyptic day for oil, making nothing of OPEC+’s plan to cut supply by at least a tenth of global supply.

Of all the wild, unprecedented swings in financial markets since the coronavirus pandemic broke out, none has been more jaw-dropping than Monday’s collapse in a key segment of U.S. oil trading.

The price on the May futures contract for West Texas crude that is due to expire Tuesday fell into negative territory — minus $37.63 a barrel. That’s right, sellers were actually paying buyers to take the stuff off their hands. The reason: With the pandemic bringing the economy to a standstill, there is so much unused oil sloshing around that American energy companies are running out of room to store it. And if there’s no place to put the oil, no one wants a crude contract that is about to come due.

Underscoring just how acute the concern over the lack of storage is, the price on the futures contract due a month later settled at $20.43 per barrel. That gap between the two contracts is by far the biggest ever.

“The May crude oil contract is going out not with a whimper but a primal scream,” said Daniel Yergin, a Pulitzer Prize-winning oil historian and vice chairman of IHS Markit Ltd.

“Refiners are rejecting barrels at a historic pace, and with U.S. storage levels sprinting to the brim, market forces will inflict further pain until either we hit rock bottom or COVID clears, whichever comes first, but it looks like the former,” said Michael Tran, managing director of global energy strategy at RBC Capital Markets.

The lack of storage combined with production that is still above world oil demand, which has dropped 30% in just a couple of months, created the unthinkable collapse in oil prices. The world went from consuming 100 million barrels a day to about 70 million, and there’s no place to put the excess.

The people who buy crude contracts — the hedge funds and the big trading houses — didn’t make what has become a common trade at the end of the life of the May contracts. Normally, they would buy the expiring contracts to deliver the crude later at a higher price.

Kumar Venkataraman, finance professor and Maguire Chair in Energy Management at Southern Methodist University, said there’s going to be much consolidation of the industry in Texas.

“Companies that never shut down wells are thinking of doing it now,” said Venkataraman. That’s not a decision made lightly because a shutdown can destroy a well and create other production issues.

Oil prices have to be back up to $50 a barrel for drilling in the Permian Basin to be worthwhile. And producing wells need oil to be at about $25 to $30 a barrel to break even. “It’s very challenging what we have today. It’s an aberration, but even the June and July contracts are in the mid-20s.”

What just happened with the May contract is concerning, said Texas Comptroller Glenn Hegar, “but the greater impact to Texas will come if demand remains historically low for a prolonged period of time and supply gluts continue to strain storage capacity.”

Severance tax reductions would primarily affect the state’s Rainy Day Fund and State Highway Fund, and will to a lesser extent the general revenue available to meet budget needs, he said. As the state’s energy industry shrinks, other revenue, sales and franchise taxes will decline.

Hegar said oil contracts will be closely monitored, and ongoing volatility could force a reduction in the state’s revenue forecast that will be released in July.

Bud Weinstein, economist in SMU’s Maguire Energy Institute, said that “demand for oil is not going to go down forever.

“Globally, oil demand will increase at least to 2040 and the industry will recover as demand comes back,” Weinstein said.

“The question is, ‘Will the U.S. still be the biggest oil producer?’ Weinstein said. “This isn’t good news for Texas, which represents 40% of U.S. production.”

Since the start of the year, oil prices have plunged after the compounding impacts of the coronavirus and a breakdown in the original OPEC Plus agreement. (OPEC Plus is made up of the OPEC cartel and other oil-producing countries.) With no end in sight, and producers around the world continuing to pump, that’s causing a fire sale among traders who don’t have access to storage.

The extreme move showed just how oversupplied the U.S. oil market has become, with industrial and economic activity grinding to a halt as governments around the globe extend shutdowns due to the swift spread of the coronavirus. An unprecedented output deal by OPEC and allied members a week ago to curb supply is proving too little too late in the face of a one-third collapse in global demand.

There are signs of weakness everywhere. Even before Monday’s plunge, buyers in Texas were offering as little as $2 a barrel last week for some oil streams. In Asia, bankers are increasingly reluctant to give commodity traders the credit to survive as lenders grow ever more fearful about the risk of a catastrophic default.

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