The oil market’s unprecedented convulsions continued Tuesday, with steep falls in benchmark crudes in both New York and London a day after a historic plunge sent U.S. oil prices into negative territory for the first time ever. The oil collapse is due almost entirely to the economic impacts of the coronavirus pandemic and the subsequent shutdown of economic activity across much of the world, which has dried up global demand for oil even as producers keep pumping out near-record volumes. And it’s a reflection that U.S. President Donald Trump’s brokered agreement this month with Saudi Arabia, Russia, and other big oil producers to curtail production has so far done nothing to reassure the oil market—making another big agreement, or dramatic, unilateral U.S. action, increasingly likely.
How on earth did the price of U.S. oil fall to almost -$40 a barrel on Monday?
The unprecedented collapse in the price of a key U.S. grade of oil is due to a combination of factors. Oil storage space is rapidly filling up, which leaves few places to stash physical barrels of oil that come out of the ground. And the May futures contract, which fell so sharply on Monday, expires April 21—which forced traders still holding that contract to liquidate it any way they could, forcing the price ever lower.
The storage issue is particularly acute because the main terminal in Cushing, Oklahoma, is getting close to full capacity. While it normally has a maximum capacity on paper of about 80 million barrels of oil, in reality, due to tank maintenance, it can hold closer to 73 million barrels, said Energy Aspects, an energy consultancy. That means there is only a little over 20 million barrels of storage space left, and it could fill to the brim by the beginning of May.
Does that mean oil is literally worthless right now?
Not quite yet. The negative prices for oil referred to the May futures contract, which was thinly traded even during the carnage on Monday. A more indicative measure of the true price of oil in the United States is the June futures contract, which on Monday was holding steady above $22 a barrel. Meanwhile, the other global crude benchmark, Brent crude, trading in London, was also holding fairly steady on Monday because those contracts don’t have the same physical storage constraints as the U.S. contracts do. That gave some market observers hope that the dramatic collapse in the May contract was more of a mirage than meaningful.
But those hopes started to fade by Tuesday. The June contract, which had been resilient on Monday, went into freefall as well, falling more than 40 percent in pre-market trading before moderating losses to about 28 percent, down to less than $15 a barrel. (Whoops: Hours later, make that down 38 percent to under $13 a barrel.) Even Brent crude, which is more isolated from the vagaries of the U.S. oil market, fell almost 20 percent on Tuesday to just over $20 a barrel—underscoring that Monday’s price collapse wasn’t just a fluke caused by the futures market but a real indication that vaporized demand for oil will keep pushing prices lower until some semblance of economic life resumes.
But aren’t lower oil prices good for the U.S. economy? Trump was celebrating cheap gasoline just a few weeks ago.
Historically, as the world’s biggest oil consumer, yes. That’s why Trump, like all U.S. presidents before him, had until recently been pushing Saudi Arabia and other big oil producers to pump more oil and bring prices down.
But two things are different right now. First, over the past decade, the United States has itself become the world’s biggest oil producer, which means that the economy in states like Texas, North Dakota, and Louisiana needs higher—not lower—oil prices to keep companies in business and payrolls intact. U.S. oil producers have much higher production costs than rivals in the Middle East, so they need oil around $40 a barrel to break even.
The second big difference is due to the pandemic and the resulting shutdowns. In normal times, cheaper oil and gasoline allow consumers to fill up their tanks a lot more cheaply, which amounts to a giant tax cut and acts as economic stimulus. But with many parts of the U.S. economy still shut down, there’s often nowhere to drive even with cheap gas. And while airlines would normally benefit from dirt-cheap oil, few planes are flying, so there’s no help there.
Is there any way to halt the slide in oil prices?
There are two sides to the problem: supply and demand. Right now, there is still way too much oil in the global market, despite a historic deal reached this month by OPEC, Russia, the United States, and other big oil producers to curtail production and put a floor under prices. That agreement, which could remove anywhere from 9 million barrels a day to as much as 20 million barrels a day from the market, was meant to be implemented beginning in May, but that now looks too late.
As a result, big producers like Russia and Saudi Arabia are mulling making their production cuts immediately to try to slow down the rate at which global inventories fill and oil prices collapse. OPEC, Russia, and the United States—which agreed to keep monitoring the oil market situation after this month’s agreement—could also get together and agree on a further round of cuts to try to stop the bleeding.
Other producers, too, are cutting production more quickly—with countries like Canada, Venezuela, and Iraq already taking almost 2 million barrels a day off the market this month. But U.S. shale producers haven’t yet turned off the taps. U.S. oil production, about 13 million barrels a day in March, was still at 12.3 million barrels last week, despite plenty of evidence of vanishing demand due to the pandemic. That could force regulators like the Texas Railroad Commission to take more proactive steps and introduce rationing to force reluctant companies to cut supply; the commission meets Tuesday morning to discuss taking steps it has so far been leery of implementing.
In the meantime, the United States could find a way to buy barrels of oil to slash them in the national Strategic Petroleum Reserve, which would take some pressure off commercial inventories like those in Cushing. Another, less useful option still on the table for the Trump administration: tariffs on imported Saudi and Russian crude. If implemented, tariffs would make imported oil less competitive with U.S. oil, though it would be disadvantageous for U.S. refiners that need the heavier, imported oil.
On Tuesday, Trump also signaled his desire for an oil-sector bailout, similar perhaps to the tens of billions of taxpayer dollars he’s given to farmers to make up for ag-market harms inflicted by his trade wars.
Ultimately, though, in order for oil prices to find their footing, demand for crude has to make a comeback. But that won’t happen until lockdowns and other measures that freeze economic activity are lifted. Some U.S. states are planning to reopen parts of their economies as early as next week, while others are still enforcing shutdowns to limit the spread of the coronavirus.
But even with a nominal return to full activity, it’s not clear how quickly or how robustly oil demand will follow. Economists who were hopeful just a month or two ago that the economy would quickly rebound in the second half of the year now expect an anemic recovery, at best. Surveys suggest that U.S. consumers are gun-shy about resuming activities like eating out as long as the risk of the virus persists. U.S. unemployment has skyrocketed during the pandemic, leaving many consumers with less disposable income. And airlines have cut more than half their flights, and those that fly are nearly empty.
Apr. 21: This article was updated to reflect the latest oil-price moves.
No comments:
Post a Comment