Coronavirus pandemic news coverage highlighting the countless hours spent by healthcare workers caring for the sick, the daunting statistics of those affected, and the lack of personal protection equipment coupled with Stay-at-Home orders shuttering restaurants, bars, hair salons, travel, sporting events, and more leave people to wonder: When can we get back to normal?
Another side is the impact on energy markets. Sure, everyone wants low motor gasoline prices at the pump, but do they fully understand the severity of low crude prices? Volatility is not new to the energy industry. Energy markets have seen their fair share of market instability in the past and have emerged and rebounded. Supply and demand usually work together to equalize the effects of risks happening in the markets. This time, supply and demand worked against one another.
Bad timing
Geopolitics influences oil price swings across the globe. The mistiming of Russia and Saudi Arabia oil production cut agreements, amid early concerns of how Covid-19 could impact world demand, took a toll on oil prices. In early March the world unprecedently shutdown. Energy demand crashed as Americans and the rest of the world were told to stay home. International travel stopped and little to no traffic remained on highways, but oil producers continue to produce. Once differences were settled Apr. 9 between Russia and Saudi Arabia, Covid-19 had already been declared a pandemic.
Near-term oil future prices plummeted to a record low of negative $37.63/bbl for the US benchmark WTI Apr. 20. Negative pricing indicates a very real issue, with demand for gasoline and jet fuel so low, producers are wondering where to store the oil once it leaves the ground. Oil traders considered the May contract a “hot potato,” and no one wanted to take delivery of oil with much of the world on lockdown and demand so low.
Lack of storage
May WTI delivery contracts are delivered to storage facilities in Cushing, Okla. where most of the storage capacity was already spoken for, making May deliveries virtually impossible. For the week ending Apr. 17, EIA said crude oil stocks at Cushing were at 60 million bbl, net stocks of working storage capacity of 76%.
Reuters said that a record setting 160 million bbls of oil are being stored at sea in oil tankers. World storage capacity was estimated to be 76% filled in March. According to Rystad Energy, tank rentals skyrocketed to an astounding $200,00-300,000/day from $20,000/day. Despite oil production cuts beginning May 1, global storage capacity could be filled in May.
The International Energy Agency said that global oil demand for April is estimated to be 29 million b/d lower than a year ago due to the containment procedures implemented because of Covid-19. In second half 2020, demand growth will be slow and steady with December demand down by 2.7 million b/d from a year ago.
Production cuts of 9.7 million b/d from OPEC and Russia beginning May 1 will lead to lower supply. “Global oil supply could tumble below 90 million b/d in the next few months, a level not seen since 2011,” according to IEA. US and Canada are also implementing production cuts.
Capital budgets have been slashed to reflect the lower prices. It’s like a domino effect, moving from oil drilling and producing to everything downstream. Jim Burkhard, vice-president and head of oil markets research at IHS Market put it this way: “Oil and gas investment has grown to be a large and important source of US business and employment over the past 10-15 years, so the decline in prices and falling investment will have a negative impact on the US economy.”
