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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Could Oil Really Fall To $0?

The outlook for U.S. shale continues to darken with WTI testing sub-$20 territory. The supply glut could grow worse as the contraction in demand continues to deepen. 

On Sunday, President Trump extended the social distancing guidelines through the end of April, retreating from his plan to “open up” the economy by Easter. And before the ink was even dry on the $2 trillion stimulus, Congress has already started preparing the fourth emergency coronavirus legislation.   As of now, 193 million people in the U.S. and a staggering 2.3 billion people worldwide are living under some sort of lockdown order, according to Raymond James. 

In early March, a few forecasters suggested that oil demand may be slightly negative in 2020, dipping by a mere 220,000 bpd. The call was somewhat provocative at the time. 

By the middle of the month, some forecasters said the demand hit could be as large as 10 million barrels per day (mb/d) in the second quarter. A few days later, another set of analysts put it at 13-14 mb/d. By last week, the IEA warned demand could fall by 20 mb/d. 

The negative revisions could keep on coming. Oil prices dropped sharply during midday trading on Monday. “For us, this is simply reflecting the increasing awareness that oil demand is breaking away, probably by much more than the 20% we have currently in our books for April/May,” JBC Energy said.

The market has fallen apart rather quickly. Some areas are seeing catastrophically low pricing, including prices dipping into negative territory in areas far from takeaway infrastructure. 

“Estimates for the demand side are being revised downwards on an almost daily basis, while on the supply side there is still no sign of any reconciliation between Saudi Arabia and Russia,” Commerzbank said in a note on Monday. 

Analysts are now watching global storage capacity, which could fill up in weeks or months at most. The contango for Brent between May and November has widened to a record $13.45 per barrel, a reflection of the massive short-term glut. 

 “The oil market supply chains are broken due to the unbelievably large losses in oil demand, forcing all available alternatives of supply chain adjustments to take place during April and May: Onshore product storage surge, refinery run rate cuts globally, massive increase in floating storage deals and upstream supply shut-ins,” Rystad Energy’s head of Oil Markets Bjornar Tonhaugen said in a statement. 

Related: Relentless Oil Price War To Cause Huge Number Of Well Shut-Ins

Plains All American Pipeline reportedly sent a letter to U.S. oil producers asking them to curtail production, according to Bloomberg, and other pipeline companies are apparently making similar requests. “We are sending this proactive request to our suppliers to ask that you take steps to reduce oil production in response to the pandemic,” Plains said in the letter, according to Bloomberg.

Goldman Sachs sees U.S. oil production falling by 1.4 million barrels per day (mb/d) between now and the second quarter of 2020. However, the bank said that declines from lower drilling rates today wouldn’t necessarily translate into lower production until the third quarter of this year. 

But because the glut is so gargantuan, and because storage is set to run low at current prices, that means that prices ultimately have to fall even further. “For this reason, our view has been oil prices will need to move to cash costs, resulting in shut-in production,” Goldman analysts wrote in a note on Monday. 

The U.S. rig count fell by 44 (40 oil rigs and 4 gas rigs) last week, the largest decrease in four years. Notably, the Permian basin accounted for 23 of those rigs. 

Bank of America said so much depends on whether or not the world can move past the pandemic in the next few months, or if the scars linger into next year and beyond. “The oil market expects these massive supply and demand shocks to fade within 3 to 4 months, a plausible outcome,” the bank said. “However, if either shock (or both) last for 12 months or longer, the gigantic surplus could keep oil prices below $30/bbl for an extended period.”

By Nick Cunningham for Oilprice.com

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  • Andrew Doolittle on March 30 2020 said:
    Negative prices are already a reality.
    Not sure what US oil export capacity is but certainly it could handle 10 million barrels of oil a day no problem given the sudden availability of shipping plus the high water levels up and down the Mississippi.

    I've been arguing for years the Federal excise tax on gasoline needs to be eliminated and now everyone knows why. States like New Jersey could be bankrupt in a week as revenue projections go off a cliff and for far more than just gasoline.

    The entire State of Pennsylvania is in the throes of a massive fiscal crisis suddenly.
  • Mamdouh Salameh on March 31 2020 said:
    As long as the coronavirus outbreak is raging, there will continue to be outrageous and most ridiculous forecasts of demand destruction and oil price slide not dissimilar to bids in an auction.

    Still, it is no exaggeration to say that the global economy has never ever faced such a most lethal and destructive cocktail of a coronavirus outbreak, a global recession, a glut exceeding by some accounts 1.8 billion barrels, an almost full global storage, a global oil demand decline estimated by some at 20 million barrels a day (mbd) and a price war to boot.

    Moreover, the US shale oil industry is on the verge of collapse. President Trump’s administration is under pressure to keep the shale oil industry alive even on a life support machine not only because of its economic and geopolitical importance to the United States.

    The cardinal question now is how to tackle such a glut and arrest the perilous slide of oil prices.

    It is becoming very clear that only a globally co-ordinated attempt that includes all major producers including the United States, could help address this situation.

    And while Saudi Arabia and Russia find themselves at present on opposite sides on oil matters, they both share the view that ejecting shale oil from the market or at least a huge cut in shale oil production could help push oil prices up and stabilize the market.

    However, if the United States wants to enlist Russia’s and Saudi Arabia’s help to stave off the collapse of the its shale oil industry, there will have to be a quid pro quo in the form of lifting some sanctions on Russia and cutting US shale oil production significantly to appease Saudi Arabia.

    However, the chances of US Congress agreeing to lift some sanctions on Russia and the US shale oil industry agreeing major production cuts are virtually nil.

    The only hope is an end of the coronavirus outbreak hopefully soon. Once the outbreak is controlled, the global economy particularly China’s will behave like somebody who has been starved of food while in quarantine. Once allowed to eat, his appetite will be rapacious and that will exactly be the same with the global oil demand which will probably double or perhaps triple oil imports to compensate for lost demand.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Seth D on March 31 2020 said:
    While almost everyone in the world is at home, completely freezing industries like brick-and-mortar Retail, Casinos, Higher Education, Professional Sports, many Manufacturing sectors and others, Nick Cunningham again focuses on Shale.

    Even Captain Obvious passed up writing about the impact of COVID 19 on Shale during a Pandemic that has basically ground the global economy to a halt.

    But not Nick Cunningham.
  • Don Lapre on March 31 2020 said:
    Nicholas ! This is your best article yet ! I can’t wait for $0 oil and 25 cent gasoline. $0 oil will wreck the Tesla market too. I can’t wait !!!
  • Amit Gupta on March 31 2020 said:
    $0 oil? Seriously? Who writes these titles? Which commodity has fallen to $0 due to over supply and/or under demand (not including banned stuff like asbestos)?
  • Wolf Horn on March 31 2020 said:
    This is excellent training for the post-fossil economy. No dollar / euro more in the fossil industry, all investments in renewable energy!

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