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When oil became waste: a week of turmoil for crude, and more pain to come

CommoditiesApr 26, 2020 08:16AM ET
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5/5 © Reuters. FILE PHOTO: FILE PHOTO: An oil pump jack pumps oil in a field near Calgary 2/5

By David Gaffen

(Reuters) - The magnitude of how damaged the energy industry is came into full view on April 20 when the benchmark price of U.S. oil futures, which had never dropped below $10 a barrel in its nearly 40-year history, plunged to a previously unthinkable minus $38 a barrel.

In just a few months, the coronavirus pandemic has destroyed so much fuel demand as billions of people curtail travel that it has done what financial crashes, recessions and wars had failed to ever do - leave the United States with so much oil there was nowhere to put it.

While the unusual circumstance of negative oil prices may not be repeated, many in the industry say it is a harbinger for more bleak days ahead, and that years of overinvestment will not correct in a period of weeks or even months.

"What happened in the futures contract the other day indicated things are starting to get bad earlier than expected," said Frederick Lawrence, vice president of economics and international affairs at the Independent Petroleum Association of America.

"People are getting notices from pipeline companies that say they can't take their crude anymore. That means you're shutting down the well yesterday."

Evidence of the erosion of value for a product that has been a mainstay of global society since the late 19th century abounded across the world last week.

In Russia, one of the world's top producers, the industry is considering resorting to burning its oil to take it off the market, sources told Reuters.

Norwegian oil giant Equinor slashed its quarterly dividend by two-thirds. Next week will bring earnings reports from the world's largest oil companies including Exxon Mobil Corp (NYSE:XOM), BP (LON:BP) PLC and Royal Dutch Shell (LON:RDSa) PLC. They are all expected to detail additional spending cuts, and investors will be watching closely for how those companies plan to manage dividends.

U.S. billionaire Harold Hamm's Continental Resources Inc sent servicers out into fields in Oklahoma and North Dakota in the middle of the week to abruptly shut wells, and the company declared it could not make crude deliveries to customers due to poor economics.

Continental's decision to declare force majeure - usually reserved for wars, accidents or natural disasters - came as a shock, bringing a sharp response from the leading refinery industry group. But some say there is a logic behind it, even if it may not pass muster in court.

"You sign contracts based on the average norms that a society has experienced over the last 100 years. If we have a new event that is not covered by those norms, it goes into force majeure. That's what Harold Hamm and others are saying - that these are circumstances outside the norm," said Anas Alhajji, an energy market expert based in Dallas.

Even the long-rumored decision by the White House to tell Chevron Corp (NYSE:CVX) last week it could no longer operate in Venezuela, where it has had a presence for nearly 100 years, met with a shrug.

"The global climate is terrible," said one person close to a Western oil company in Venezuela. "The license almost didn't matter anymore."

The market is forcing the hands of all producers. Across the world, governments and companies are preparing to shut down output, and many have already begun.

The Organization of the Petroleum Exporting Countries and its allies had already committed to record cuts of 10 million barrels of daily supply that have yet to take full effect. That commitment was not enough to prevent oil's fall below zero.

Saudi Arabia has said it and other OPEC members are prepared to take further measures, but made no new commitments. It is a measure of the depth of demand destruction that even if OPEC stopped producing altogether, supply may still exceed demand.

More than 600,000 barrels per day in production cuts have already been announced in the United States, along with another 300,000 bpd of shut-ins in Canada. Brazil's state-run Petrobras has reduced output by 200,000 bpd.

Azerbaijan, part of the group of nations known as OPEC+, is forcing a BP-led group to cut output for the first time ever. Oil majors in those countries have generally been excluded from government-imposed cuts.

“We have never done it before since they came to the country in 1994 and signed the contract of the century,” a senior Azeri official told Reuters.

That accommodation can no longer be made with the world running out of space to put oil. As of Thursday, energy researcher Kpler said onshore storage worldwide is now roughly 85% full.

Demand is expected to fall by 29 million bpd in April, the International Energy Agency estimated. Paris-based IEA expects consumption to pick up in May, but researchers cautioned that its expectation of a mere 12 million bpd fall in year-over-year demand may be too optimistic.

"I'm sure hearing the same numbers about demand destruction of 20 to 30 million barrels a day," said Gene McGillian, analyst at Tradition Energy, who was working at the New York Mercantile Exchange when U.S. crude futures were launched in 1983. "Until we see some kind of alleviation of that, you have to wonder what is in store."

When oil became waste: a week of turmoil for crude, and more pain to come
 

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Comments (10)
Fred Smith
Fred Smith Apr 27, 2020 12:04AM ET
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$1 per gallon 87 octane will get rid of the glut
Kaveh Sun
Kaveh Sun Apr 26, 2020 10:07AM ET
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Physical oil is still positive. Those were futures contracts. Oil producers got paid not to delivered.
Jo Joe
Jo Joe Apr 26, 2020 8:50AM ET
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Daily Corona19 positive reached 100k yesterday for the first time. Corona19 will continue till end of this year.
Ernie Keebler
Ernie Keebler Apr 26, 2020 8:41AM ET
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Oil demand destruction 2nd best thing that happened to the planet, cleaner air, less control by greedy pumping countries. Let's dig deep to find ways to keep this going after restarting economies. Let's strive for something better than the old normal in all aspects of life
רועי לוין
רועי לוין Apr 26, 2020 7:04AM ET
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So tomorrow the market will ago down as a result?
Robert Simanton
Robert Simanton Apr 26, 2020 6:43AM ET
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Sounds to me like they are tslking up Tesla so they can short it again.
Artem Nasonov
Artem Nasonov Apr 26, 2020 6:26AM ET
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market will sort it out.  No one will be producing oil if price is low as simple as that. some countries started come back to reopen shops and work places.
Paul Meenan
Paul Meenan Apr 26, 2020 6:26AM ET
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Can those oil dependent countries and companies hold their breath until the price recovers?
Mikhail Noskov
Mikhail Noskov Apr 26, 2020 6:26AM ET
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Good idea.... for about 2-3 years? or... forever???
Mikhail Noskov
Mikhail Noskov Apr 26, 2020 6:08AM ET
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When storage capacities are over and demand is less then production, then the price will be negative. It's as simple as that.
Kaveh Sun
Kaveh Sun Apr 26, 2020 6:08AM ET
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Physical oil is still positive. Those were future contracts. Oil producers sell contracts in advance(ie futures dilivery)
Hamad Abbas
Hamad Abbas Apr 26, 2020 4:05AM ET
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When the going gets tough, the tough get going. More unexpected situations cannot be ignored.
Kaveh Sun
Kaveh Sun Apr 26, 2020 2:06AM ET
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Cost 2usd a day to store. Cant sell to refineries now. If u have a contract to buy oil now, u just give it way or at a negative because of those 2.
 
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