COVID-19 Impact Drives Oil Futures To Lowest Price In History

Negative oil pricing has become a reality—and with it comes the lowest price (in real terms) in the history of the oil industry, IHS Markit reported April 21. The previous record-low price—East Texas crude at $0.10/bbl in 1931 ($1.70 in 2020 terms)—is now in distant second place as West Texas Intermediate (WTI) futures settled at minus $37.63/bbl.

This previously unimaginable record low reflects a massive physical supply surplus, the expiration of the May 2020 WTI contract, and the high cost of scarce crude oil storage capacity, the firm explained. The June 2020 contract, which will soon take over as the front month, settled at $20.43/bbl today, suggesting that oil will not be worthless at that time. Trading volumes for the June contract were five times higher than the soon-to-expire May contract. While some may see today’s negative pricing as a quirk of the futures market calendar, it is an ominous sign.

“There is no need to consult old inflation tables to calculate the lowest price in real terms in the history of the oil industry,” said Jim Burkhard, vice president and head of oil markets, IHS Markit. “Today’s first ever negative oil price displaces the previous low of $0.10/bbl in 1931. Some may dismiss Monday’s fall into negative WTI prices as a quirk of the futures market on the last day before a contract ended. But the fact that prices went this low at all reflects brutal market forces that will not disappear with the expiration of a single monthly contract.”
  • Negative pricing reflects brutal market forces that are forcing supply to adjust to a much lower level of world oil demand. Very low prices combined with a lack of crude oil storage capacity are leading to forced production cuts. If you cannot sell oil and cannot store it, then you cannot produce it.
  • More words and action are likely to come from major oil-producing governments. It remains to be seen what those actions could be. But governments do things they would not normally consider when conditions become intolerable.
  • Beyond the second quarter of this year, IHS Markit anticipates that “stay at home” orders will ease and production cuts will diminish the severe global oil supply surplus.
But until then, emergency conditions exist in the oil industry owing to the massive demand collapse.

“Early trading for the June 2020 WTI contract was above $20 per barrel Monday, suggesting that oil will not be worthless for long,” Burkhard said. “But emergency conditions—especially lack of places to store oil—will remain until stay-at-home orders ease and production cuts can diminish the severe oil supply surplus. Production cuts and shut-ins could remove as much as 17 MMbbld of supply from the market this spring.”

SOURCE: The Weekly Propane Newsletter, April 23, 2020. Subscribers receive all the latest posted and spot prices from major terminals and refineries around the U.S. delivered to inboxes every week. Receive a center spread of posted prices with hundreds of postings updated each week, along with market analysis, insightful commentary, and much more not found elsewhere.