The slump in West Texas Intermediate oil to an unprecedented low of negative $US40 a barrel has painfully proved that the cheapest place to store oil right now is inside a well.
The collapse in the price of the US May benchmark oil contract was a one-off quirk, sparked by oil traders and commercial buyers scrambling to dump the contract ahead of its expiry so they didn’t have to take delivery at a time when a surfeit of supply has left US pipelines, onshore tanks, and offshore tankers engorged with crude oil.
That the world’s most traded commodity, the mainstay fuel of global transportation, would be considered less than worthless – albeit temporarily – serves as an exclamation point on the double-whammy of oversupply and the violent destruction of demand triggered by the shutdown of the world’s largest economies in the wake of COVID-19.
The global oil industry is now reaping what it has sown. The cack-handed price war started by Russia and Saudi Arabia in early March could not have been more poorly timed.
Aimed at inflicting damage on the US shale industry, whose addiction to cheap money has allowed it to stay in the game, the attempt to monster the oil market has ended up knee-capping all involved as demand has been eviscerated by COVID-19.
If there was ever a time for self-help, it is now. The agreement between the Organisation of Petroleum Exporting Countries (OPEC) and Russia to cut oil production by 9.7 million barrels a day is a big step in the right direction.
The twitter boast from US President Donald Trump on March 13 that the pact was a “Great deal for all!” looks like a distant prospect. The rhetoric isn’t translating into reality – yet.
There will be more pain to come, such is the oversupply of oil. That 9.7 million barrels a day pledge is dwarfed by OPEC’s warning last week that excess supply would be around 15 million barrels a day in the second quarter.
The need for self-help is dawning on the US shale oil industry. It is the biggest pain point, underscored by the collapse in WTI prices and its discount to Brent oil prices, the international benchmark oil price.
The closely-watched Baker Hughes weekly rig count showed the number of active rigs fell to 438. That’s the biggest weekly drop since February 2015.
It appears burning cash on a near-worthless commodity that nobody wants is helping focus the mind.
ConocoPhillips has cut its US production by 125,000 barrels a day, while Continental Resources, which produces around 300,000 barrels a day, has slashed production by 30 per cent.
The price collapse has also shone a spotlight on exchange-traded funds and their role in compounding the misery in the US oil market.
These products look like a low cost and convenient way for retail investors to play the oil price. The truth is much different.
The structure of these funds, such as the US-listed US Oil Fund, is that futures contracts need to be rolled from one month to the next.
With the global oil market in what OPEC last week called a “super contango”, when futures prices are significantly higher than near-term prices, that becomes a very costly exercise.
Basically, funds like the US Oil Fund – which hold large licks of near-term contracts – have been forced to sell low and then buy high.
Retail investors can’t say they weren’t warned. Top oil trader Pierre Andurand, whose Andurand Capital is the world’s largest pure oil trading fund, had a one-word descriptor for the actions of retail investors: clueless.
There seems to be little relief in sight for those traders – professional and retail – betting on a rebound in the WTI oil market.
US producers, especially those inland and away from the coast, will continue to struggle to find somewhere to park their oil.
RBC Capital Markets commodity strategist Michael Tran estimates stockpiles at the Cushing storage hub have built up to 59 million barrels, leaving around 10 million barrels of unused capacity.
With a dearth of storage, it’s not surprising that when the market offers the free gift of oil the reply is no tanks.
Extracted from AFR