Oil futures tense historic price crash as glut overwhelms storage

NEW DELHI: Weaned on a diet of expensive oil for over a century, the world has been left fumbling for a way to describe the unthinkable: negative crude prices. In other words, ‘buyers’ are now being paid to accept US oil shipments.

While Tuesday saw a brief recovery in West Texas Intermediate (WTI) prices after Monday’s plunge to (-)37.63 a barrel, it wasn’t for long. As of 6 pm IST, WTI prices had slipped to (-)4.7 a barrel and Brent crude had breached the $20 per barrel mark to $18.87/barrel as of 11.55 pm IST — about 70% lower than its 2020 peak of $68.91 in January. This is Brent’s lowest level in two decades.

The Covid-19 hammer blow has eviscerated oil demand over the past two months — shuttered factories and idle transport fleets require no fuel, after all — leaving the world’s storage facilities filled to the brim.With no access to sea-based tanker storage, unlike their Brent and Middle-Eastern counterparts, matters came to a head for US oil producers on Monday as contracts for May delivery approached expiry (April 20/21).

WTI oil contracts are honoured physically at Cushing, Oklahoma, an inland oil supply hub in the US, and contract holders are required to take possession of the oil at the hub.

In this instance, the critical lack of available storage led to a historic, jaw-dropping first. In the few hours before expiry, prices plunged from $18 per barrel to negative (-)$37.63 as panicked producers and contract-holders began paying customers to take the oil off their hands.

The contract expiry may have acted as a force-multiplier in Monday’s freakish plunge, but the incident is a stark harbinger of the disaster facing the world’s oil sector and global financiers who bankroll them.

The crisis is one of simple logistics, but on a humongous scale. The world has limited storage facilities — estimated at around 6.8 billion barrels — and energy experts say that around 60 per cent of this is already full. Oil storage is also a significantly expensive proposition, and storing petroleum with no buyers is a loss-making proposition.

“Never before has the oil industry come this close to testing its logistics capacity to the limit,” the International Energy Agency (IEA) said last week, warning that the glut “threatens to overwhelm… the oil industry – ships, pipelines and storage tanks – in the coming weeks”. And despite the OPEC+’s decision to cut supply by an unprecedented 9.7 million barrels a day (mbpd), IEA expects oil stocks to build by 12 mbpd in the first half of 2020 as demand falters.

The impact of the pandemic could well see a paradigm shift in economic and geopolitical relationships. For top oil producers — the US, Saudi Arabia and Russia — and many smaller oil-dependent countries, the collapse of the market promises a world of hurt. Canada, for instance, has already halted oil production and announced a bailout plan.

For US shale firms, any price below $40 per barrel makes drilling a loss-making venture, and many are on the brink of bankruptcy. Some Saudi Arabian fields are profitable at as low as $10 per barrel, but its fiscal balance enters negative territory once prices go below $84.

This fiscal break-even point is $42 per barrel for Russia and a whopping $195 for Iran.But, while large countries have sufficient fiscal cushions to deal with rock-bottom prices, they may be catastrophic for smaller, but highly oil-dependant countries such as Venezuela and many African nations.

According to the World Bank, oil profits accounted for a whopping 36% of GDP for the Republic of Congo in 2017, Iraq (37.8%), Kuwait (36.6%), Libya (37.3%), Oman (21.8%) and South Sudan (31.3%). In fact, the Middle East and North Africa region saw 15% of GDP coming from oil profits in 2017.“Such prices will destroy the clout of (some) countries..,” said a senior executive in one of India’s OMCs.

A cascading impact is also expected in the financial sector, with big American banks like JPMorgan Chase, Bank of America and Citigroup Inc having large exposures to oil and gas debt. Even ICICI Bank saw stock prices plunge 9% on Tuesday after it declared $100 million exposure to Singapore-based oil trader Hin Leong Trading Pte, which is facing charges for failing to disclose losses.

At the sovereign level, the world’s top five oil majors have seen their combined debt rise to $230 billion in 2019, while corporate oil giants like Royal Dutch Shell, BP, Total, Equinor and OMV have all reportedly entered global bond markets to raise debt.

But, while May contracts are a bust, futures for June and later are trading higher, offering some hope. “(Current price) doesn’t necessarily represent future market conditions... (since) NYMEX June is trading near $20,” said Tapan Patel of HDFC Securities.