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April 21, 2020

Bloodbath in US oil market

Top Story

April 21, 2020

NEW YORK: US crude oil futures collapsed below $0 on Monday for the first time in history, amid a coronavirus-induced supply glut, ending the day at a stunning minus $37.63 a barrel as desperate traders paid to get rid of oil, foreign media reported.

Brent crude, the international benchmark, also slumped, but that contract was nowhere near as weak because more storage is available worldwide.

West Texas Intermediate, the US benchmark, traded as low as -$40.32 a barrel in a day of chaos in oil markets. The settlement price on Monday was -$37.63, compared to $18.27 on Friday. Traders capitulated in the face of limited access to storage capacity across the US, including the country’s main delivery point of Cushing, Oklahoma.

The collapse will be a blow to Donald Trump, who has gone to great lengths to protect the oil sector, including backing moves by OPEC and Russia to cut production and pledging support for the industry.

It is unclear whether the low prices will trickle down to consumers, who typically see lower oil prices translate into cheaper gasoline at the pump. Traders fled from the expiring May US oil futures contract in a frenzy on Monday with no place to put the crude, but the June WTI contract settled at a much higher level of $20.43 a barrel.

“Normally this would be stimulative to the economy around the world,” said John Kilduff, partner at hedge fund Again Capital LLC in New York. “It normally would be good for an extra 2% on the GDP. You’re not seeing the savings because no one is spending on the fuels.”

The May US WTI contract fell $55.90, or 306%, to settle at a discount of $37.63 a barrel after touching an all-time low of -$40.32 a barrel. Brent was down $2.51, or 9%, to settle at $25.57 a barrel.

Brent, the international benchmark, lost 8.9 per cent on Monday to fall to $25.57 a barrel, but is less immediately afflicted by storage issues. Brent is a seaborne crude allowing traders to easily ship it to areas of higher demand.

Amrita Sen at Energy Aspects said: “With Brent you can put it on ships and move it around the world immediately. Storage tanks at Cushing, however, will be full in May.”

“It’s like trying to explain something that is unprecedented and seemingly unreal,” said Louise Dickson, oil markets analyst at Rystad Energy. “Pricey shut-ins or even bankruptcies could now be cheaper for some operators, instead of paying tens of dollars to get rid of what they produce.”

Refiners are processing much less crude than normal, so hundreds of millions of barrels have gushed into storage facilities worldwide. Traders have hired vessels just to anchor them and fill them with the excess oil. A record 160 million barrels is sitting in tankers around the world.

US crude stockpiles at Cushing rose 9% in the week to April 17, totaling around 61 million barrels, market analysts said, citing a Monday report from Genscape.

The spread between May and June at one point widened to $60.76, the widest in history for the two nearest monthly contracts.

Investors bailed out of the May contract ahead of expiry later on Monday because of lack of demand for the actual oil. When a futures contract expires, traders must decide whether to take delivery of the oil or roll their positions into another futures contract for a later month.

“The storage is too full for speculators to buy this contract, and the refiners are running at low levels because we haven’t lifted stay-at-home orders in most states,” said Phil Flynn, an analyst at Price Futures Group in Chicago. “There’s not a lot of hope that things are going to change in 24 hours.”

Prices have been pressured for weeks with the coronavirus outbreak hammering demand while Saudi Arabia and Russia fought a price war and pumped more. The two sides agreed more than a week ago to cut supply by 9.7 million barrels per day (bpd), but that will not quickly reduce the global glut.

Saudi Arabia is considering applying oil cuts as soon as possible, rather than starting from May, a Wall Street Journal reporter said on Twitter, citing sources.

Brent oil prices have collapsed around 60% since the start of the year, while US crude futures have fallen around 130% to levels well below break-even costs necessary for many shale drillers. This has led to drilling halts and drastic spending cuts.

Weak global economic data also pressured prices. The German economy is in severe recession and recovery is unlikely to be quick as coronavirus-related restrictions could stay in place for an extended period, the Bundesbank said.

Japanese exports declined the most in nearly four years in March as US-bound shipments, including cars, fell at their fastest rate since 2011.

US oilfield services giant Halliburton Co on Monday reported a $1 billion first-quarter loss on charges and outlined the largest budget cut yet among top energy companies.

Earlier, Canadian oil companies begun shutting down steam-driven oil sands production projects as prices continue to fall, a British wire service reports, noting the move could have dire long-term consequences for the production facilities.

Steam-driven oil sands production, also called steam-assisted gravity drainage, involves injecting steam into an oil sands deposit to melt the bitumen and make it flow up the well. To ensure long-term production, the temperature and pressure at such sites must be maintained at a certain level. Disruption, Reuters explains, could result in permanent damage, which would translate into a permanent loss of production.

Yet Western Canadian Select (WCS), the heavy oil benchmark of Canada, has been trading below $10 for about ten days now, with a temporary spike to $10.13 a barrel last Thursday. At the time of writing, WSC was trading at $-0.01 a barrel.

As a result, producers are being forced to cut. Canadian oil producer Husky Energy cut its oil sands output by 15,000 barrel per day (bpd). Cenovus reduced its production by 45,000 bpd and said it could raise this further to 100,000 bpd, nothing a cut of this size wouldn’t damage the bitumen reservoirs. ConocoPhillips last week said it would cut its oil sands output by as much as 100,000 bpd.

Meanwhile, US stocks were shaken deeply into the red Monday after oil traders desperate to unload near-term contracts for their vital commodity sold at a loss.

The Dow Jones industrial average closed down 592 points, 2.4 percent, to finish the day at 23,650.44. The broader Standard & Poor’s 500 index fell 51 points, or 1.8 percent, to 2,823,16. The tech-heavy Nasdaq slid 89 points, or 1.0 percent, to 8,560.73.

Investors expect Monday’s volatility to stay in place in coming days as Wall Street heads into the thick of the earnings season, with closely watched names like Coca-Cola, Lockheed Martin, AT&T, Eli Lilly, American Express and Verizon releasing financial results this week.