Publications: Notes at the Margin

Negative Crude Prices? (March 16, 2020)

 

This Notes at the Margin covers several topics. We list these issues here and then discuss them in more depth below. All the subjects, though, point to a common question: Will some crude oil types trade for less than zero?

 

Negative commodity prices are very unusual but not impossible. Crude producers in West Texas paid buyers to take natural gas off their hands last summer. In 2016, crude producers in North Dakota supposedly paid buyers to accept their crude, although it is difficult to find specific references to this. In both cases, high transportation or storage costs exceeded the raw materials’ value.

 

This week, we ask whether the same phenomenon will occur in global crude markets. We conclude that negative prices will be recorded absent changes in the strategy behind the crude oil price war set off by Russia. The first negative-price victims will be Canadian and Venezuelan producers. African producers might also have to pay buyers to take their crude. Even some US producers could be affected if the spread of the novel coronavirus (COVID?19) depresses consumption sufficiently.

 

The threat of widespread or prolonged periods of negative oil prices, or even just very low prices, is a serious one. Such prices will undermine the financial stability of the oil business and could contribute to a global economic collapse.

 

Our analysis covers the following points.

 

• First, we note that Russia’s attack on fracking is real. We were right to suggest last week that Vladimir Putin instigating the oil price war was a revenge tactic. Several reports have confirmed our view. However, many who follow the oil market have been too focused on the Saudi response to recognize Russia’s intent.
• Second, we extend the price war discussion, examining several recent detailed analyses that highlight the Saudi reaction.
• Third, the Saudi actions last week drove up oil shipping costs rapidly. The higher expense of chartering tankers raised the cost of storage and drove the cash price down hard.
• Fourth, additional volumes of oil will hit the market from producers such as Nigeria.
• Fifth, a record supply/demand imbalance will boost storage costs due to the substantial volumes of unsold oil. This oil will also tie up global shipping capacity, resulting in higher and higher transportation rates.
• Sixth, the higher charges for tankers and storage will reduce spot crude oil prices. Producers of some crudes that trade at a considerable discount to Brent will find they must pay buyers to take their oil or stop producing.

 

Finally, the ultimate losers from the price battle will be US and European oil companies that are unprepared to operate in an environment where costs must be trimmed to less than $10 per barrel.

 

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