The recovery in U.S. oil prices is still weeks away, Goldman Sachs' head of commodities Jeffrey Currie told CNBC's Power Lunch.
The reason for the note of caution is because cutting oil production is not a simple matter. It takes time and costs money, and, perhaps more importantly, it could damage the well, Currie said.
"Shutting down a well is extremely expensive, and sometimes you damage the well forever," he told CNBC, adding that, "We don't think this is the end of it. You're likely to see this continue to go on at least through the middle of May."
West Texas Intermediate slumped to more than minus $38 a barrel yesterday. The slump into negative territory—the first in history—was, in large part, driven by traders exiting their positions in the futures market to avoid physical delivery of the crude that they had bought earlier.
However, there has been no change yet in demand for crude oil globally, and U.S. producers are running out of storage space for their product. The shortage of storage space also contributed to WTI's 300-percent dive from yesterday.
In this environment, Goldman's Currie is far from alone in expecting more pain.
"This will cause a lot of people to shut in (their wells). At these prices, there's no way," the Houston Chronicle quoted a Texas oil and gas investor as saying in comments on the news about WTI's dive into negative territory. "It reminds me of the '80s in a way, but this thing is worse. Incredible, absolutely incredible."
Reuters reported this week that oil in floating storage had reached a record high at 160 million barrels last week, according to sources from the shipping industry. That was a 100-percent increase over the previous week as traders scrambled to store their unsold and currently unsellable oil.
In the United States, the federal government was reportedly in talks with nine companies to lease storage space from the Strategic Petroleum Reserve. The SPR has a capacity of 713 million barrels of crude, with the current level of occupancy at 635 million barrels.
By Irina Slav for Oilprice.com
ADVERTISEMENT
More Top Reads From Oilprice.com:
- What’s Next For Oil As Prices Go Negative?
- The Big Shale Short: Twitter Traders Make Millions On The Oil Price Crash
- The Real Winner Of The OPEC+ Output Deal
When they had a chance to contribute to OPEC+-led global efforts to cut production in support of oil prices, they were very noticeable in their refusal. Therefore, it is high time they share some of the pain most oil-producing countries of the world have suffered for years.
It is hoped that their current ordeal might teach them to mend their ways and cooperate with OPEC and other non-OPEC producers to stabilize oil prices once the coronavirus outbreak is over.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London