The historic plunge in the price of US oil and oil storage issues is exerting tremendous pressure across the oil and gas industry and will likely have rippling effect on economies of the world, say experts.

 

The oil and gas market took an unprecedented turn on April 20 when the market saw the West Texas Intermediate (WTI) oil traded at negative prices – producers were actually paying buyers to take their barrels. 

 

The WTI May futures nosedived 300% to as low as almost negative $40 in early trades on April 20.

 

A compound disruption of storage capacity constraints, Covid-19 related hit on short-term demand, uncertainty about long-term demand, additional barrels in the market and the particularities of how oil is traded (today is the final trading day of WTI futures contracts for physical delivery in May) are some of the key factors that led to this situation.

 

Although today WTI is no longer traded in the “red territory”, the pressure could mount again when the June physical delivery trading window pushes to the end, says Pedro Gomez, Head of Oil and Gas at the World Economic Forum.

 

The current market context is exerting tremendous pressure across the oil and gas industry and those companies with higher break-even prices and smaller balance sheets are more exposed.

 

This situation does not only affect companies, but many countries and their populations. For exporting countries (particularly in the developing world), oil and gas-related revenue funds all sort of activities, including health. Without a steady flow of petrodollars, governments of these nations could find that addressing the health emergency created by Covid-19 will be even more challenging. Consuming countries could see this as windfall but nations where petrol consumption is heavily taxed at the pump will see state coffers impacted, he says.

 

"A further question in the minds of many is how the current oil and gas crisis will impact energy transition plans. While it is difficult to say how long the demand slump will last, it poses challenging questions to the near term trajectory of the global energy transition,” says Gomez.

 

Nandakumar Premchand, Director at GlobalData, a leading data and analytics company, says: “Covid-19 and its containment measures across the globe have meant that the demand for oil has gone down by 30%. Though Opec+ decided to cut production by 10% by 9.7 million bpd, that will only take effect in May. Saudi has already lined up shipments for the United States. Given this and the storage space in the US fast filling up, we are looking at massive storage issues in the months to come.

 

“The WTI June futures were trading at around $22. Taking note of the fact that ETFs like the US Oil will not take a physical delivery of oil, the strategies adopted by traders for the June expiry will be closely examined. With many feeling that the 10% production cut wasn't enough in the current times, it will be interesting to see if there are further production cuts or if the FED intervenes in some fashion to douse the fire.

 

“Oil prices at these levels and the lack of demand will mean that we could be looking at pandemonium next month, especially if the lockdown extends beyond May. With companies signing up for floating storage tankers globally to store excess oil, even this option will cease to exist shortly,” says Premchand. - TradeArabia News Service