War of fears: can the price of oil fall below zero

US, WASHINGTON (ORDO NEWS) –Some analysts suggest that in the near future, oil prices may become negative, that is, oil companies will begin to pay buyers for the possibility of supplies. How realistic is this scenario?

The risks of subsidence in oil demand coupled with Saudi Arabia’s promises to increase production by a quarter – from 9.7 million barrels per day (b / s) in February, according to OPEC, to 12.3 million b / s in April – raised concerns not only a landslide fall in quotes, but also their decline to negative levels.

This forecast was made , in particular, by Mizuho Bank analyst Paul Sankey, who estimated that global supply now exceeds demand by 15 million bps, which could lead to a shortage of oil storage capacities in the coming months. As a result, manufacturers will have to pay buyers for the very possibility of supply.

The riddle of negative prices

A similar collision occurred last spring in the Texas gas market, where prices fell below zero due to unscheduled repairs to the El Paso pipeline, whose capacity fell by a third after the breakdown of two compressor stations.

As a result, upstream companies operating in the Perm basin on the Texas-New Mexico state border were faced with an excess of associated gas produced by oil, the prices of which reached negative values ​​at the local Waha Hub hub, from minus ten cents to minus four dollars per million British thermal units, as follows from Refinitiv data.

Presenting something like this in the oil market is still difficult. First of all, because of the relatively high availability of American oil storage facilities, such as in Cushing, where oil traded on the New York Stock Exchange is stored and where, according to the Energy Information Administration of the United States Department of Energy (EIA), storage capacities were filled only by 51 March, 7% (38.5 million of 74.4 million barrels), and the country as a whole, where they were involved by 58.4% (453.7 million of 777.2 million barrels). For comparison: on December 13, long before the coronavirus epidemic unfolded, these rates were 54% and 57.5%, respectively.

Such an imperceptible difference is probably due to the fact that the oil industry has not yet had time to feel the contraction of global demand. According to the March projections of the International Energy Agency (IEA), in the first quarter it should decrease by 2.4 million bpd (to 96.7 million bpd against 99.1 million bpd in the first quarter of 2019), and for the year as a whole – by 90,000 bps (up to 99.9 million bps).

Actual, rather than projected, consumption has not changed much so far, and confirmation of this is the dynamics of American oil imports , which in the first two weeks of March (6.4 million and 6.5 million b / s, respectively) was only slightly lower than the January level (6, 6 million bps), while exports in the second week of March, for the first time in the history of statistical observations, the EIA (since 1991) exceeded 4 million bps, reaching 4.4 million bps.

In European and Asian countries, ahead of the US in the implementation of antiviral measures, demand began to sag a bit more, and even then only in recent months. This is evidenced by the statistics of shipping by Refinitiv: having increased in 2019 by a little less than 0.1% (up to 388.9 million tons), Eurozone maritime oil imports in January decreased by 3.5% in annual terms (to 33.2 million tons), and in February (excluding supplies on February 29) – by 9.2% (up to 28.2 million tons).

A similar trend is characteristic of China, Japan and South Korea, the total sea import of which in 2019 increased by 5.3% (to 745.2 million tons), and in January and February decreased by 1.8% and 4.7%, respectively (up to 65.6 million and 56.9 million tons). This partly explains why Saudi Arabia has not yet managed to seriously increase export shipments,

Price of fear

In this regard, the current drop in Brent and Urals quotes, which for the first time in a long time fell below $ 30 and $ 20 per barrel, is associated not so much with the actual contraction in demand, but with uncertainty about how long and large-scale the impact of coronavirus on the oil market will be. As soon as such certainty looms on the horizon, prices will inevitably wait for a rebound, possibly to the corridor of $ 40-50 per barrel, the return to which seemed quite realistic in the first days after the OPEC + deal was broken.

In the meantime, market participants will have to reap the fruits of fear, the benefit of which will be the owners of oil supertankers, whose rental prices have jumped sharply, including due to the need of companies for additional storage capacity for the period until prices recover.

For example, Shell, according to March reports by Argus, rented two oil supertankers (Sea Lion and Sea Pearl) for five months at an average rate of $ 40,000 per day, while the cost of freighting supertankers from the Gulf of Mexico to China for the second week of March increased by 107% (to $ 55.6 per ton), and from the Middle East to East Asia – by 213% (to $ 42.2 per ton).

Freight rates will probably continue to increase in the coming weeks – unlike oil quotes, which, however, are unlikely to drop to negative values.


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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.