An oil economist recently opined that oil prices could go negative.
What he meant was that oil production and refining infrastructure is significantly overwhelmed by storage capacity which is fast running out.
High inventories and reduced oil storage capacity across the world are causing a rapid decline in prices, as offtakes dip in response to the ongoing global economic downturn prompted by Covid-19.
Brent crude oil prices are currently about $27 per barrel down from about $65 three months ago.
An oil economist recently opined that oil prices could go negative. What he meant was that oil production and refining infrastructure is significantly overwhelmed by storage capacity which is fast running out.
“Giving’ away oil is literally the opportunity cost of creating storage space to maintain minimum production throughputs to avoid very expensive shutdowns and startups of oil production infrastructure.
High inventories and reduced oil storage capacity across the world are causing a rapid decline in prices, as offtakes dip in response to the ongoing global economic downturn prompted by Covid-19. Brent crude oil prices are currently about $27 per barrel down from about $65 three months ago.
I last saw prices persistently in the $20s in 2003 just before the super Chinese economic takeoff that ultimately sent prices to over $140 in 2008. Kenyans are already enjoying a pass-through of windfall price reductions, with further drops expected.
The virus is currently the key determinant of the oil industry fate as free market supply/demand dynamics have been overtaken by the virus. The world was consuming about 100 million barrels per day (bpd) prior to the Covid-19 emergence, and estimates are that 30 million bpd of demands have since evaporated over the last three months.
And demands could continue to decline (or indeed increase) depending on the direction, speed and extent of the virus impacts, which of course is subject to counter measures implemented (or omitted) by various governments around the world.
The recent agreement by oil producers to cut production by 10 million bpd is no match to the current 30 million bpd over-supply, and had no significant influence on prices. However, there are positive indications that as countries, especially China and US, take steps to cautiously re-open economic activities, oil demand will revive and prices strengthen. However, the caveats are how the virus fights back with resurgences and what scientific wins are made with vaccines.
The most disoriented oil producers are the US shale oil companies whose production break-even costs are much higher than the prevailing oil prices. Many have already shut-in production while others are expecting a saving miracle from President Trump. Shale oil is the most contradictory story of recent years. It enabled the USA to be the number one global oil producer and made the country energy independent. This happened from 2016 when OPEC and Russia sacrificed their production to prop up global oil prices.
Now OPEC and Russia are insisting that every producer in the world (including the USA) must participate in production cuts, as the virus is impacting all. But this would be taboo for the USA and its free market antitrust laws that prohibit cartel-like supply and price fixing practices. It will be no surprise if President Trump finds political solutions around these legal predicaments, and save US shale oil producers, this being an election year.
The ongoing Covid-19 assault reminds me of a science fiction literature set book in my mid-1960s high school days (The War of the Worlds by H.G. Wells) when in late 1890s foreign creatures (Martians from Mars) invaded the counties around London setting everyone in total panic, social disorientation, and with many deaths. Finally, it was an earthly pathogen that attacked and decimated the outer-space invaders whose immuno-systems were no match for the earthly pathogen.
The Covid-19, whose true origin is yet to be ascertained, has tested the entire leadership of the world, turned the world upside down, and created panic and confusion. Like the fight against the Martians, it will be a yet-to-be-found vaccine (weakened pathogens) that will decimate the Corona virus, a scientific not a political solution. It is encouraging that a pattern of credible strategies to counter Covid-19 are emerging as lessons are learned from both successes and mistakes.
By the time the global economies are out of the virus stranglehold, they will look very different, as has always happened in the past when nations emerge from major crises. Government and self-imposed sector reforms will be inevitable, and this will equally apply to the oil industry. Indeed, the virus will be a major shake-up for the oil industry.
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