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Stuart Burns

Stuart Burns

Stuart is a writer for MetalMiner who operate the largest metals-related media site in the US according to third party ranking sites. With a preemptive…

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What Happens If Oil Prices Go Negative?

Various reports hit the news feeds today quoting a deliberately headline-grabbing statement by Paul Sankey, managing director at Mizuho Securities, in which he is reported as saying, “Oil prices can go negative.” That is, they could as a combination of Saudi Arabia (and Russia) flooding the market with increased oil and the market running headlong into COVID-19-induced curtailment of activity that is suppressing consumption, which combined will create the perfect storm of excess supply.

In reality, inventory levels are already rising.

CNN quotes Sankey, who said global oil demand is only around 100 million barrels per day.

However, the economic fallout from the coronavirus pandemic could crash demand by up to 20 percent.

This would create a 20 million barrel-per-day surplus of oil in the market that would rapidly exceed storage capacity, forcing oil producers to pay customers to buy the commodity – hence, in effect, negative oil prices.

The American government plans to purchase a total of 77 million barrels of oil starting within weeks the article states, but according to Sankey, this can only be done at a rate of 2 million barrels per day, leaving a massive excess that will be looking for a home.

Brent oil prices have already fallen to the lowest level for 17 years. The consequences for the U.S. oil industry if a coronavirus-induced recession drives down demand could be catastrophic.

West Texas Intermediate crude (WTI) collapsed by a staggering 19.2 percent to $22 while the Mexican Basket is down 22.4 percent.

For a short while, hedges will protect producers and they will continue to pump oil. While that will protect producers for a while, it encourages counter-cyclical practices; producers should be cutting back but instead will probably continue to pump and ship into store.

Francisco Blanch, a commodity strategist at Bank of America, warns in a Fox Business report that the demand destruction caused by the COVID-19 virus and the price war between Saudi Arabia and Russia could cause inventories to swell by 900 million barrels in the second quarter alone. He estimates the world currently has about 1.5 billion barrels of available storage.

Storage, however, is regional and may not match neatly with excess supply.

China continues to build storage capacity, having traditionally been short of space, but is now in a better position to take advantage of ultra-low prices.

“In a severe scenario, if the market struggles to find a home for surplus barrels, then oil prices might have to trade down into the teens,” Blanch suggests. That would leave U.S. and Canadian producers deeply in the red when hedges run out. Weaker OPEC countries, like Iraq, Iran, Venezuela, and Nigeria, could see their economies collapse, while all offshore production would be loss-making if oil prices remain suppressed into the teens over the long term.

Related: How Chevron Could Win Big On “The Worst Oil Deal Ever”

Having laid out the worst-case scenarios, it should be said even Saudi Arabia and Russia will burn through their reserves at a clip if prices fall into the teens. As such, some form of truce, one that would support prices and reduce output, is possible.

In addition, our focus has naturally been on the direst of outcomes from the current pandemic: a combination of short, sharp lockdown shock and the acceleration of new vaccines could see us in a much more optimistic situation two months from now.

A recession? Yes, inevitably, but for how long? The first half of the year, maybe, before some form of stability reasserts itself.

Still, who can blame them? “Negative oil” has a ring to it.

Just don’t expect to get a credit to your card when you fill up your tank — it ain’t going to happen.

By Stuart Burns via AG Metal Miner

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  • Mamdouh Salameh on March 21 2020 said:
    Some oil price projections are moving into the realm of fantasy and the ridiculous with the suggestion that the oil price could go negative.

    If global demand loses an estimated 20% because of the coronavirus outbreak, this means that inventory levels will rise. Once global storage becomes absolutely full, oil producers have then two choices: either they lower their prices significantly to stimulate demand or cut their production.

    However, if we ever find ourselves in such a situation, it will mean that the coronavirus outbreak has got such a grip on the world that we could be thinking of starvation, global bankruptcy and a complete collapse of law and order rather than about oil price going negative.

    News coming from China indicate a badly-awaited success in containing the outbreak. If the measures taken by China are proving successful, then the world should adopt them pending the development of an effective anti-coronavirus vaccine.

    Soon the outbreak will be history with global oil demand and prices recovering all their recent losses.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Kejora Kapital on March 21 2020 said:
    Is it possible that crude oil will become negative? meaning that the oil will become free?
  • William Smith on March 21 2020 said:
    Europe doesn't have the ability to enforce China-like restrictions. It doesn't have the police force, nor totally obedient citizens. You can't tell people that only 1 member of each house can leave the house, for 1 hour per week, as they did in China, and expect total obedience.
    The US SPR can only be topped up at 1mb/d because it wasn't designed for this, even the maximum outflow is just 4mb/d. And it's almost full with only 77mb of additional capacity, just like it was designed to be. Adding new capacity would take many months to years to dissolve the salt domes.
    In the US about half of all crude demand is for personal transportation, of which a huge proportion is commuting. That demand is about to go close to 0.
    Because US producers have hedged, they will continue to produce at maximum, and oil prices will crash.
    William Smith, PhD Mathematical Finance (Commodities), Birkbeck, London, UK
  • Brian Bresee on March 21 2020 said:
    I must agree with Dr Mamdouh G Salameh, that projections into the negative are ridiculous. China's oil usage is already returning, as will Europe's soon, followed by the United States.

    Oil producers are smart businessmen, not fools. Giving away a product for free never lasts very long. $20/barrel is already priced to lose money, it won't last long.

    There are already of this being worked out with new policy decisions within the United States, Russia and Saudi Arabia will anxiously respond to those changes. And when the formal announcement of an agreement is publicly made, the movement in the price of oil will be swift. The goal of oil traders is to be ready when that announcement comes without notice, and to certainly not be on the wrong side of such an announcement.

    Trading oil is no doubt like playing poker, knowing when to hold em and when to fold em. World leaders and small traders alike are playing the same game.
  • Al Abdool Mohammad on March 21 2020 said:
    I think you are all foolish to be propostering these ideas

    Al Abdool Mohammad PhD Oil Studies
    Professor & Head Economic Unit
    American University of Ajmaan, UAE
  • Umaru Yakubu on March 22 2020 said:
    If one can produce any commodity and there is no market demand for it, why continue to sink money to produce more at loss. The answer is suspend production or minimize it according to current market volume demand.
  • Syed Ahmad on March 22 2020 said:
    Anyone who stops selling will lose customers, and it's hard to bring them back.

    With Covid19, a cure is at least 18 months away, and it's only going to get worse, not better. So either oil production goes down, or it sells for $3 a barrel. Supply and demand is not the only factor. Producers like Saudi lost a lot of customers last time they lowered production, their market was snapped up by Russia and others, so no one can afford to lose market share. It's gonna be cheap oil for a very long time, 5 years minimum
  • David Cartes on March 22 2020 said:
    This has unconsidered issues. To me the biggest issue is 'what countries have idled salt mines?' China may he building new storage capacity. But many counties, like the US and many impoverished countries, may already have the capacity to artificially increase demand. The oil market in the US should collaborate to make this happen, as it is in there own, and the USA, self-interests.
  • Colt Studz on March 23 2020 said:
    This simply falls under the Law of Supply & Demand. Let's accept the fact that, in view of the scarcities of oil-buyers/consumers brought about by the corona virus issues that resulted into the reduced and/or stoppage of transport businesses in almost all fields on land, air at sea, etc., the amount of supplies and/or stocks obviously went up. Hence the direct effect into the pricing that went down.

    Oil companies, whether they like it or not, still have to sell their products in either small or huge volumes otherwise they can opt to get out of this business.

    Prices of oil commodities will never reach the level of seemingly like "giving it away" to the end-users. The present oil issues can be considered as psywar and let's wait until the virus issues dissipate because we would see then the wrath of the shoot-up of prices on a global scale. Hang on....
  • Abraham N A on March 24 2020 said:
    If such crash happen in the selling price of crude oil, then most Middle East nations will start to sell off their gold reserves, to protect the nation.

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