Oil continues to fall due to deep mismatches in unprecedented situation
Reference oil prices collapsed again today in the face of low demand due to uncertainty about the economic reopening in the wake of the cornavirus pandemic and the possibility of crude oil storage facilities running out of space, an unprecedented situation.
Meanwhile, as he usually does, US President Donald Trump has announced on tweet that "we will never let the big oil and gas industry fall", and stated that "I have instructed the Secretary of Energy and the Secretary of the Treasury to formulate a plan to ensure that these very important businesses and jobs are secured in the future".
The price of the West Texas Intermediate (WTI) barrel in May, which was due today, closed at $9, after sinking on Monday for the first time in history to negative levels of up to -37 dollars, while the WTI and the Brent delivery in June, both benchmarks, lost 43% and 25%, respectively. The Brent fell to 2001 levels. ¨The paralysis of activity due to the VOC-19 pandemic is hampering demand for a raw material that is suddenly no longer so essential.
No storage capacity
The world of oil is living through days that can only be described as madness: the capacity to store crude oil can be exhausted in a few weeks, the quoted funds linked to the raw material are in free fall, the producers of the less productive wells in North America are bleeding to death and now having oil tankers, converted into "floating warehouses", is one of the most profitable businesses in this time of generalised falls. ¨"The picture is quite pessimistic until June, so we consider that WTI prices are going to continue to fall in June and July," said today Lefteris Karagiannopoulos, an analyst with the energy consulting firm Rystad Energy, which estimates that there is space left in the deposits around the world for 400 million barrels, so in "a few weeks" there will not be where to store so much oil.
The deposits in Cushing, an Oklahoma town that appears on maps only because it is the main reserve for the oil futures traded in New York and Chicago, have gone from being at 50% capacity to almost 80% in a month, technically on the verge of running out of room to continue operating. In addition, the Dutch company Royal Vopak, the world's largest oil depot, announced today that its capacity is "almost completely exhausted" worldwide.
The world needs 10 million barrels less
Someone who a year ago took over WTI futures, the world reference barrel along with Brent, which expired in May, paid out about 50 dollars and yesterday would have had to not only give up everything he had invested, but also pay the buyer of that title to take those barrels of oil, which nobody demands and which must be kept somewhere. Right now the world needs around 10 million barrels of oil less to operate in this state of hibernation to which it has been forced, but the producing countries continue to extract crude oil, so storage facilities have become the destination of the surpluses.
Without planes flying, vehicles coming and going from work and a large part of the business being closed, the price of all oil indicators is in free fall: the WTI delivery in June fell today by 43% to $11.57 and the delivery in September fell by 16% to $25, while the Brent in June remained at $19 and the October Brent at 30.5. Investors prefer to pay much more for oil in the future than they do now, so storage has become the most demanded service in the sector and industry, especially producers with more expensive operations, who are facing an unprecedented "earthquake" if prices continue to fall until the summer, according to Rystad Energy.
The largest fund quoted or ETF, in its acronym in English, the United States Oil Fund, valued at nearly 4,000 million dollars, had to stop its quotation today by the falls and ended the day losing 26% of its value. Analysts who closely follow the energy market expected a misalignment due to the strategy followed by Saudi Arabia and Russia in the midst of the pandemic: to take out of the market those who exploit unproductive deposits, as is the case in Canada and the United States, "literally" flooding the world with cheap oil. However, the current mismatch has led the Organization of Petroleum Exporting Countries (OPEC) and Russia to announce last week a cut in production by 10 million per day in May and June. This is something that doesn't seem to be able to control the falls at the moment.
Struggling to correct the market
For his part, U.S. President Donald Trump, in addition to launching a tweet with the promise of "we will never let the great oil and gas industry fall", and declaring that "I have instructed the Secretary of Energy and the Secretary of the Treasury to formulate a plan so that these very important companies and jobs are secured in the future", announced yesterday that the U.S. will add 75 million barrels to its strategic reserve, a move similar to that carried out by China, something that also does not seem to be sufficient to correct the crude oil market.
¨"We don't know what the new transport habits and return to economic normality will be after the pandemic," Antoine Halff, researcher at Columbia University's Global Energy Policy, explained today. ¨"This situation affects not only companies, but also countries, especially exporters in developing countries, whose oil revenues finance all kinds of activities, including health investments," recalled Alexandra May, spokesperson for the World Economic Forum.