War of fears: can the price of oil fall below zero

Photo By Vasily Fedosenko / Reuters

Some analysts assume that in the near future, oil prices may become negative, meaning that oil companies will start paying customers for the possibility of deliveries. How realistic is this scenario?

Risks of sagging oil demand coupled with promises Saudi Arabia to increase production by a quarter-from 9.7 million barrels per day (b / d) in February, to data OPEC, up to 12.3 million b / d in April-raised fears of not just a collapse in quotations, but also their decline to negative levels. With this forecast come forward in particular, Mizuho Bank analyst Paul Sankey estimates that global supply now exceeds demand by 15 million b / d, which may lead to a shortage of oil storage capacity in the coming months. As a result, manufacturers will have to pay customers for the very possibility of deliveries.

The riddle of negative prices

A similar collision occurred last spring in the Texas gas market, where prices fell below zero due to unscheduled repairs on the El Paso pipeline, whose capacity is decreased by a third after the failure of two compressor stations. As a result, upstream companies operating in the Permian basin on the border of the States of Texas and new Mexico faced an excess of associated gas produced with oil, prices for which at the local Waha Hub reached negative values-from minus ten cents to minus four dollars per million British thermal units, as follows from Refinitiv data.

It is still difficult to imagine something like this in the oil market. First of all, this is due to the relatively high availability of American oil storage facilities, such as in Cushing, where oil traded on the new York exchange is stored and where, according to data Energy information administration of the United States Department of energy (EIA), warehouse powers by March 13, only 51.7% were filled (38.5 million out of 74.4 million barrels), and 58.4% were used in the country as a whole (453.7 million out of 777.2 million barrels). For comparison, on December 13, long before the coronavirus epidemic unfolded, these figures were 54% and 57.5%, respectively.

This subtle difference is probably due to the fact that oil companies have not yet had time to feel the squeeze on global demand. According to the March projections of the International energy Agency (IEA), in the first quarter it should fall by 2.4 million b/d (to 96.7 million b/d against 99.1 million b/d in the first quarter of 2019), and for the year as a whole-by 90,000 b/d (to 99.9 million b/d). Actual, rather than projected, consumption has not changed much yet, and the dynamics of the us oil market is proof of this import's , which in the first two weeks of March (6.4 million and 6.5 million b / d, respectively) was only slightly lower than the January level (6.6 million b/ d), while export in the second week of March, for the first time in the history of statistical observations, the EIA (since 1991) exceeded the mark of 4 million b / s, reaching 4.4 million b / s.

In European and Asian countries that are ahead of the US in implementing antiviral measures, demand has started to sink a little more, and only in recent months. This is evidenced by Refinitiv's shipping statistics: having increased in 2019 by slightly less than 0.1% (to 388.9 million tons), marine oil imports by Euro zone countries in January decreased in annual terms by 3.5% (to 33.2 million tons), and in February (excluding deliveries on February 29) --- by 9.2% (to 28.2 million tons). Similar dynamics are typical for China, Japan and South Korea, whose total sea imports in 2019 increased by 5.3% (to 745.2 million tons), and in January and February decreased by 1.8% and 4.7%, respectively (to 65.6 million and 56.9 million tons). This partly explains why Saudi Arabia has not yet managed to significantly increase export shipments, which in the first 18 days of March fell almost as much in annual terms (by 2.6%, to 17.8 million tons) as in January and February combined (by 2.9%, to 58.8 million tons).

The price of fear

In this regard, the current decline in Brent and Urals prices, which for the first time in a long time fell below the $30 and $20 per barrel levels, is not so much due to the actual compression of demand, but rather to uncertainty about how long and large-scale the impact of the coronavirus on the oil market will be. As soon as such certainty looms on the horizon, prices will inevitably wait for a rebound, perhaps to the $40-50 per barrel corridor, a return to which looked quite realistic in the first days after the OPEC + deal was broken.

In the meantime, market participants will have to reap the benefits of fear, which will benefit only the owners of oil supertankers, whose rental costs have jumped sharply, including due to the need for additional storage capacity for the period before prices recover. For example, Shell, according to the March messages Argus, leased two oil supertankers (Sea Lion and Sea Pearl) for a period of five months at an average rate of $40,000 per day, while the cost of chartering supertankers from the Gulf of Mexico to China for the second week of March grow up by 107% (to $55.6 per ton), and from the Middle East to East Asia --- by 213% (to $42.2 per ton).

Freight rates will probably continue to rise in the coming weeks --- unlike oil prices, which, however, are unlikely to fall to negative values.

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