United States oil futures turned negative for the first time in history on Monday with traders dumping May contracts as analysts warn that crude storage will fill to the brim by next month, and US shale firms weigh the real possibility of shutting down production.
US benchmark West Texas Intermediate (WTI) crude for May delivery crashed more than 300 percent on Monday, deep into negative territory, touching -$40.32 before clawing back to settle at -$37.63.
The speed and swiftness of the May contract’s death spiral took even seasoned oil veterans by surprise.
“Wow. Prices needed to fall given the rapid decrease in demand and storage filling quickly. But I did not expect them to fall so fast,” Samantha Gross, an energy and climate fellow at the Brookings Institution, told Al Jazeera. “We have never seen companies paying to have their oil taken away. It can’t stay this way for long – it is the market signalling that storage is filling rapidly and that more production isn’t needed.”
By turning negative, prices are signalling that traders are actually paying to have oil taken off their hands.
“WTI doesn’t have anywhere to go,” Louise Dickson, oil markets analyst at Rystad Energy, told Al Jazeera. “Traders have had a whole month to sit on this oil and decide what to do with it, and tomorrow is the last day they could sell it.”
April 21 is the last day to trade May 2020 WTI on the New York Mercantile Exchange (NYMEX). And US shale oil finds itself in a major bind with limited storage options.
WTI for June delivery was holding above $21 a barrel on Monday.
Brent crude, the global benchmark for oil, is trading around $26 a barrel, having plummeted by as much as 70 percent since the start of January as coronavirus lockdowns have destroyed global demand in crude.
The US Energy Information Administration last week reported a record 19.3 million-barrel crude stock build. There is currently a remaining 21 million barrels of storage available at the Cushing hub in Cushing, Oklahoma.
But that will fill up to the brim by mid-to-late May, Rystad Energy predicts.
The tsunami of supply has battered the US shale market, where many firms need crude to fetch between $48 and $54 a barrel to break even, according to the Federal Reserve Bank of Dallas.
Oil prices were already weighed down by oversupply going into 2020, and were further pressured by coronavirus containment measures that have obliterated demand. But crude prices went into free fall last month after Saudi Arabia initiated an oil price war in retaliation for Russia not agreeing to deep output cuts to offset the blow from COVID-19 disruptions.
With US shale oil producers getting hammered by the oil price war, US President Donald Trump appealed directly to Saudi Arabia’s de facto leader, Crown Prince Mohammad bin Salman and Russian President Vladimir Putin to set aside their differences and stabilize oil markets.
Those efforts culminated in an historic agreement on April 12 between Saudi-led OPEC and its allies led by Russia, a group known as OPEC+, to cut output by 9.7 million barrels per day.
But oil market analysts say even those record-breaking curbs are simply not enough to salvage a market in unprecedented distress.
Even before the OPEC+ deal struck among the top oil producers earlier, analysts anticipated storage to run out in mid-May. Now, compliance with that deal is proving to be a big challenge.
Dickson said oil filling up in May is tantamount to a “doomsday” scenario, adding: “Countries had 15 days to cut 9.7 million barrels in production. It’s not a realistic amount of oil to cut.”
Now, hundreds, maybe thousands, of producers in the Permian Basin in the southwestern US are at risk of shutting down production as oil storage tanks at the Cushing near capacity.
“When Cushing gets full, the midstream operators will say you cannot buy oil. Then Pioneer, Chevron and the other big companies will have to make the decision to shut in – meaning close a well – or try to sell their oil at an extreme loss,” Dickson said.
Some companies would rather lose a lot of money in the short term, rather than close an oil well because a shut-in is extremely expensive. Still, Rystad predicts more shut-ins to come in Wyoming, Colorado, and North Dakota, which already announced a 170,000-barrels-per-day shut-in back in March.
“Market prices are showing that oil is all but worthless now,” said Jim Krane, a fellow in energy studies at Rice University’s Baker Institute for Public Policy. “It’s going to take a long time to draw down the huge supply overhang,” he told Al Jazeera.
There are some creative measures that could provide a modicum of relief, say analysts. Producers can work with midstream companies to move shale to the Gulf Coast and store it offshore. But Dickson says that there can only be so many tankers in the Gulf, and offshore storage can get quite expensive.
Another possible workaround is to buy crude stockpiles for the US’s Strategic Petroleum Reserve. But instead of physically transporting the oil, the US government could pay the producer to store oil in the ground – effectively creating a remote strategic reserve.
“This helps the administration save the shale players and accomplishes two good things: getting supply off the market and giving shale some money, and US government buying oil at a market discount,” said Dickson.
“We already see a bit of a correction in the June contract, but traders have another month or so to dump these holdings,” she added. “And right now, I think there is a ‘wait and see attitude’ from traders to see if the OPEC+ cuts result in any meaningful supply relief.”