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Oil Producers Insist On 'No Zero Price' Contracts

Following the unprecedented market carnage that saw US benchmark prices drop below zero last week, producers selling crude oil to Asian customers have started to add a new clause in their contracts under which the cost of their oil will not go below $0.00 a barrel in any circumstance, Reuters reported on Thursday, quoting numerous sources.

The price of WTI Crude May futures slumped to as low as -$37 a barrel early last week, after crashing by more than 300% last Monday, a day before the WTI Crude May contract expired, as traders rushed for the exit to avoid owning physical barrels of oil for delivery in May. 

The negative price of oil—an industry first in the unprecedented demand collapse and oil glut—spooked sellers of oil into Asia, who started to insist on the ‘no zero oil price’ in their contracts, according to Reuters’ sources. Alongside the slump of the WTI Crude futures into negative territory, some grades sold in Asia were being priced in the low teens because of the heavy discounts and the crashing demand. 

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Most buyers in Asia have accepted the ‘no zero price’ clause, which aims to protect sellers from having to pay buyers to take their oil, Reuters’ sources said. 

The gist of the new clause in contracts is that the price of oil cannot be lower than $0.00 “in any circumstance,” with a buyer at an Asian refinery confirming to Reuters that there was a new clause that stipulates the minimum price of $0.00 or $1.00 per barrel. 

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“No one ever expected prices to go negative!” one of the sources, who works with an oil producer, told Reuters. 

Currently, most of those clauses are mostly applied to condensate—ultra-light crude—sold in Asia, as condensate is much cheaper than heavier grades and is not in high demand, according to Reuters sources. 

The fact that oil producers now include legal clauses to protect themselves against negative oil prices speaks volumes of the current market conditions of enormous oversupply amid collapsing demand.  

By Tsvetana Paraskova for Oilprice.com

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