The oil market is in freefall. The sector collapsed into pandemonium this week when the West Texas Intermediate (WTI) oil price benchmark fell below zero for this first time in history, making U.S. oil not only worthless but a liability, closing at -$37.63 a barrel on Monday. While WTI has since recovered considerably, but its future is uncertain. If this week has taught us anything it’s that all bets are off. Now the question on the mind of many is, if it was possible for U.S. oil to go so deeply negative, is the same historic nosedive in store for Brent Crude, the international oil price benchmark? The answers vary. One leading oil economist told Energy Voice that it would “require something cataclysmic” for the Brent benchmark to follow U.S. crude into negative pricing. But when Bloomberg posed the question “Can Brent crude oil follow WTI into negative territory?” the answer was an unequivocal: “You bet.”
The negative prices are the result of a monthslong crisis in oil markets, beginning with a plummet in oil demand around the globe thanks to the spread of the novel coronavirus. As economies around the world shut down, the leading OPEC+ members of Saudi Arabia and Russia were pressured to find a solution, but instead, their talks quickly devolved into an all-out oil price war, flooding the international oil market with a huge glut of crude oil to the tune of about 10 million barrels of oversupply per day. This week, the glut reached critical mass when the volume of oil on the market maxed out oil storage capacity around the globe, driving the nosedive of oil prices all the way below zero (well below) in the United States and Brent hit an 18-year low at just $20 a barrel.
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In an article published on Tuesday, Energy Voice reported that despite Brent’s dire straits, “Professor Alex Kemp of Aberdeen University does not foresee it going down the same path to zero or negative pricing.” The petro-expert told reporters that “The two prices, WTI and Brent, are in some ways linked but, to some extent, they are separate. The main reason being that Brent reflects the world balance of supply and demand and WTI reflects the position inside America. [...] We wouldn’t get negative prices for Brent because Brent is the world market and it would require something cataclysmic for the world economy to get a negative Brent price.”
Other experts, however, are taking the opposite view and preparing for Brent to go negative. “ICE Futures Europe Ltd. confirmed on Tuesday night that it’s preparing various Brent prices for just that possibility if there’s the demand to do so -- even if there’s still a long way to go before that happens since June contracts are trading at about $20 a barrel,” reported Bloomberg on Wednesday. “Beyond the mechanistic side of negative pricing there’s also a market reality: the world’s storage sites are filling with crude fast -- the precise concern that caused West Texas Intermediate to turn negative.”
Brent does not function in the same way as WTI, however. “While the Brent futures contract is cash-settled against the value of the Brent index price, the WTI contract is physically settled, meaning a trader must take delivery of barrels of oil at Cushing in Oklahoma, hundreds of miles from the coast.”
This does not change the fact that oil storage is filling up around the globe, and filling up fast. “Well over 100 million barrels of oil is now being held in floating storage -- by another estimate more than twice that. [...] With on-land sites either completely booked up or filling fast, there’s still pressure on Brent.” We’re not out of the woods yet.
By Haley Zaremba for Oilprice.com
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Still, the level of price collapse of the WTI crude was very unusual. However, US shale oil producers have been facing unusual problems, namely rising outstanding debts almost reaching one trillion dollars, inability to export their oil or selling it at home because of the current circumstances and lack of their own storage. Renting storage outside would have cost them far more the contract price for their oil in the current situation. So they had to either give it away or sell it at any price.
US shale oil producers have been for years taking advantage of OPEC+’s production cuts to enhance their market share at the expense of OPEC+ members by producing excessively even at a loss and undermining OPEC+ efforts to support oil prices by trying to cap them. Shale oil producers didn’t even spare a thought for other oil-producing nations of the world whose livelihood they have trampled on for years with the full knowledge that US tax payers will bail them out even when their outstanding debts are heading towards $1 trillion. They had a chance recently to redeem themselves and agree to cut production and join OPEC+ efforts to stabilize oil prices but they adamantly refused. They continued to show the ugly face of capitalism. They paid for their greed and obstinacy by the recent collapse of the WTI crude oil price to less than $1 a barrel.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London