While I forecasted Negative oil prices were on their way last month, it’s still SHOCKING to see it happen to such a degree. Today, the May WTI futures contract saw the price drop to a stunning NEGATIVE $38 a barrel. Gosh, I thought we might see slightly negative oil prices, especially in the Canadian Oil Sands or Shale Oil, but I never imaged it falling to $38 with a MINUS sign in front of it.
I started writing about SINGLE DIGIT and or NEGATIVE oil prices back in March. I based this forecast due to the oil supply not falling fast enough to offset the massive drop in demand. The U.S. WTIC was impacted so much more than BRENT Crude because traders who bought the contracts weren’t able to sell it due to a lack of storage bookings in Cushing, Oklahoma.
This was explained in the Zerohedge article, Here Is The Full Explanation Behind Today’s Unprecedented Negative Oil Price:
Courtesy of IHSMarkit’s energy vice president Roger Diwan
How did you end up with negative oil prices? This happens when a physical futures contract finds no buyers close to or at expiry.
Let me explain what that means:
A physical contract such as the NYMEX WTI has a delivery point at Cushing, OK, & date, in this occurrence May. So people who hold the contract at the end of the trading window have to take physical delivery of the oil they bought on the futures market. This is very rare.
It means that in the last few days of the futures trading cycle, (which is today for this one) speculative or paper futures positions start rolling over to the next contract. This is normally a pretty undramatic affair.
What was happening yesterday was trades or speculators who had bought the contract found themselves unable to resell it and had no storage booked to get the crude delivered in Cushing, OK, where the delivery was specified in the contract.
This means that all the storage in Cushing was booked, and there was no price they could pay to store it, or they were totally inexperienced in this game and were caught holding a contract they did not understand the full physical aspect of as the time clock expired.
The contract roll and liquidity crunch that made the extreme sell-off yesterday possible but it DOESN’T necessarily represent futures market conditions: NYMEX June settled Monday at $21.13.
The June contract is not out of the woods either: yesterday’s action indicates that physical oil markets at Cushing are not in good shape and that storage is getting very full.
Unless the U.S. Shale Oil Industry really starts to cut back on production, we could see the same INSANITY take place in the June Futures price.
Furthermore, even if several states start to GO BACK TO WORK on May 15th, I highly doubt we are going to see a large percentage of Americans HEADING OUT. Of course, many will, but we won’t see the huge increase in gasoline consumption right. So, the ongoing glut of petroleum products in the United States is likely to continue for quite some time until 2-3 million barrels per day of oil production are SHUT-IN.
And, this spells real TROUBLE for the U.S. Shale Oil Industry that was already on shaky grounds before the global contagion began. But, also remember there are TWO NAILS in the coffin taking place at the same time:
- U.S. Oil demand is likely down 7-8 million barrels per day. This will force oil companies to shut in thousands of wells. Trying to bring these wells back online will be very costly, and many won’t return to the same production level they were before being shut-in.
- The oil price trading at the low $20s, or lower to the $15+ range, is also killing the Balance Sheets of the U.S. Oil Industry.
So, the massive cut in oil demand (soon, supply) and the ultra-low prices will destroy the already weakened U.S. Shale Oil Industry.
NO… BAILOUTS WON’T MATTER…
I continue to see individuals suggest that the Shale Oil Industry can be bailed out. While that may be true, the real problem has to do with the fact that three of the four largest shale oil regions have already BLOWN through 80-90% of the CORE ACREAGE. Thus, the U.S. Shale Industry was going to IMPLODE with or without the global contagion.
I will be putting our more articles and videos on how I believe the future will unfold… and it isn’t pretty.