09/17/2020

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A Crazy Week for Crude



Selling Something Nobody Uses

On Monday, an overabundance of crude oil collided with a poorly timed contract schedule and forced oil prices to fall to historic lows. Those losses bled into Tuesday, though the per-barrel price for West Texas Intermediate crude—the US benchmark—broke back above zero by yesterday morning.

The demand problem is a direct result of the coronavirus pandemic. As life has come to a halt in the United States and in many parts of the world, demand for oil is exceptionally low, global pumps are still operational, and now storage space for the commodity is running out.

On Monday, that meant crude oil prices on the May contract for West Texas Intermediate futures fell to a historic low of -$37.63. If the price had held on, that would have meant sellers would have to pay buyers to take their oil. The price rose again on Tuesday, but analysts expect the market to struggle for the foreseeable future. One Deutsche Bank (DB) analyst wrote to clients that they should expect oil prices to appear in the negatives again within the month.

Demand for oil in April could end up at lows not seen since 1995. Compared with last April, demand is expected to be reduced by 29 million barrels per day, the International Energy Agency reports.

Saudi Arabia’s Short Term Victory May Not Be a Long Term Win

Saudi Arabia and Russia appeared to score a win after American oil prices fell to historic lows on Monday. Remember, earlier this month, the two nations reached a deal to remove 9.7 million barrels of crude oil from the market every day after May 1 to help stabilize prices.

Still, analysts don’t expect the victory to last long. Dave Ernsberger, Head of Commodities Pricing at S&P Global Platts said on Tuesday that, “Saudi Arabia and Russia have both won here, but it’s a very pyrrhic victory.” He added that, “they need to look over their shoulder because Brent is not far behind, other crude benchmarks are not far behind, and the world is running out of storage.”

As if on cue, Brent crude futures—the international benchmark—tumbled to their lowest level since 2002 reaching $19.33 per barrel—a 24% drop.

Some Cause for Hope in Oil Futures


It’s possible that the American oil situation is more hopeful than the May West Texas contract suggests. Some analysts think timing on the contract was to blame for the negative price on Monday. They say the June contract is trading more actively and might be a more accurate measure of oil prices. On Tuesday, the June contract had oil priced at $15.75 per barrel. That’s a 22% drop, but it’s not a negative price.

For context, the May contract was hurt by poor timing. Essentially, these contracts arrange for the delivery of oil on the contract date. In this case, that’s May 1. Usually, as the deadline for the contracts approaches, airlines or refineries buy the contracts for close to the price of oil. In this case, however, airlines don’t need the oil and refineries have nowhere to store it. Instead, they started bidding on June’s contract. That’s why the price fell so far.

Additionally, there was tempered optimism surrounding President Trump’s claim that he “will never let the great US Oil & Gas Industry down.” On Tuesday, Trump ordered Energy Secretary Dan Brouillette and Treasury Secretary Steven Mnuchin to devise a possible rescue package for the struggling sector. Yesterday, Brouillette organized a phone call with several members of Congress to brainstorm what aid might look like. While Trump appeared to shoot down the idea of any aid being included in the small business relief bill working its way through Washington, it will be important to watch for how soon an individual solution might be reached for the oil industry.


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