US oil prices turn negative for first time in history
As space to store oil ran out, traders were forced to sell at historically low prices
By Ed Clowes 20 April 2020 • 7:24pm
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Oil prices suffered
a historic crash in the US on Monday, falling to just 1 cent before going negative for the first time ever as demand collapses in the face of the coronavirus crisis.
A barrel of American oil was trading for
less than a litre of petrol on Monday afternoon, with prices collapsing from an already ultra-low base of little more than $18.
The price later tipped into negative territory for the first time ever - meaning oil firms were willing to pay traders to take the product off their hands. It fell as low as -$40.32.
The plunge was driven by
fears of a huge US recession after jobless claims surged and lockdowns brought the economy to a halt. Such little oil is being used that the country is expected to run out of storage space within a fortnight.
Phil Flynn, senior market analyst at Price Group Futures, said that the crash in West Texas Intermediate (WTI) oil was a "horror show". He said: "The market looks like it has no bottom."
The plunge in prices - affecting a contract to buy oil that will lapse on Tuesday- is unprecedented and far bigger than anything recorded since the Second World War.
The price of WTI oil due to be delivered in June held up better, suggesting that traders are hoping demand will eventually rebound. It dropped 16pc but stayed above $20 a barrel.
Brent crude, the European pricing measure, fell by 9pc to $25 but was spared the worst because there is more storage space on this side of the Atlantic and oil can more easily be shipped to countries where it is needed most.
The world is awash with crude as producers have continued to pump, despite traditional buyers disappearing as countries shut their economies down to curb the spread of Covid-19. If storage space runs out, producers will be forced to close their wells completely.
Louise Dickson, an oil market analyst at Rystad Energy, said: "The WTI destruction today is certainly epic in scale."
Her colleague Bjornar Tonhaugen, head of oil markets, added: "The real problem of the global supply-demand imbalance has started to really manifest itself in prices.
"As production continues relatively unscathed, storage is filling up by the day. The world is using less and less oil and producers now feel how this translates in prices."
Oil firms are weathering their worst month on record as demand for crude plunges by 29 million barrels a day in April. Frantic efforts by the world's biggest producers to cut output have failed to stop a slump in prices.
A plunge in orders
caused by global lockdowns has pushed oil consumption down to levels not seen since 1995, according to the International Energy Agency (IEA).
Mr Tonhaugen said: "Such price levels will continue to force shut-ins and to cause more job losses as operators try to lower costs to be able to cope with the low price environment."
The chaos has plunged US producers in to crisis.
Most companies in the industry, especially those laden with debt, are not economically viable when the price of Brent crude falls much below the $50 mark.
Earlier this month shale producer Whiting Petroleum filed for bankruptcy, making it the first major casualty of this latest downturn.
On Monday, US oilfield services company Halliburton reported a $1bn loss during the first quarter after writing down $1.1bn of assets following the oil price crash.
The world’s leading oil nations met in March
and agreed to slash their output by a record 10 million barrels a day in a desperate effort to save the market from a slump – but the size of the cuts failed to impress when markets reopened, with prices continuing to fall.
Failed efforts to work together followed a collapse in relations between Russia and Saudi Arabia last month which triggered a price war that sent the cost of Brent crude crashing more than 50pc, at the same time as the coronavirus crisis sparked a unprecedented collapse in demand.
Although the two sides have now reached a new agreement, it has done nothing to spark a recovery.
Shale oil in fight for survival
The oil price war has left the debt-laden US shale oil industry fighting for survival once again, and the Trump administration scrambling to help a key industry in Republican heartlands.
Oil crashed as much as 34pc last week after Saudi Arabia ramped up production in retaliation at Russia’s refusal to cut its own production.
Drillers extracting oil from shale rock in areas such as Texas’s Permian Basin have boomed since about 2010. Yet their success has required mountains of debt, and they are also victims of their own success – pushing oil and gas prices down.
Many were pushed to the brink during the oil price crash of 2014, when Saudi Arabia declined to cut production to stabilise prices. But they hunkered down and became leaner.
Still, most depend on oil prices around $55 per barrel, and experts now fear they will be pushed into major cuts or bankruptcy by the current $32 per barrel.
Russia is unlikely to budge during Opec talks – particularly given that sinking the US oil industry is seen as at least part of the plan. Prices could sink as low as $20.
Shale drillers are already cutting back on spending – and could cut as much as $100bn (£80bn) this year, with Occidental’s spending down by 32pc and Marathon’s by 21pc. The White House said last week it was considering federal support for the shale oil industry.
But Bjarne Schieldrop, chief commodities analyst at Nordic bank SEB, said: “It’s Russia against US shale, and Saudi Arabia against Russia. If there is no last-minute Opec deal, then there is basically only one outcome: US shale oil production has to decline.”
