Subzero Oil Prices and the Storage Problem
As I am sure you have seen on the news, oil prices have been dropping. A barrel of West Texas Intermediate (WTI) traded above $60 at the beginning of 2020. But after drastic changes in both supply and demand for oil, WTI traded at negative prices in the futures market April 21 for the first time in history. Holders of the May 2020 WTI contract paid others to take the oil off their hands.
How did it come to this?
Global oil demand has been dropping due to the COVID-19 pandemic. In 2019, worldwide oil consumption was about 100 million barrels per day (mb/d). The International Energy Agency (IEA) currently estimates that demand for the month of April will be around 70 mb/d, a 30% reduction from last year. For the entire year, the IEA is predicting a decline in demand of 3 mb/d, which assumes that the pandemic starts to clear up in the next couple of months.
Supply has also been part of the issue, as Saudi Arabia announced during March that the Kingdom would increase its production and lower prices. This was in response to the failure of the Organization of the Petroleum Exporting Countries (OPEC) to reach an agreement on production quotas for its members. OPEC has since agreed to production cuts starting in May, but those will only be 10 mb/d, still leaving a surplus in the market.
Oil that is pumped and not used must go into storage, but storage facilities are getting full. That is why prices went below $0 in April: it was cheaper to pay someone to take the oil off your hands than it was to move it into a storage facility.
In response to these low prices, drilling companies have been shutting down rigs. In six major oil basins (Bakken, Permian, Rockies, MidCon, Eagle Ford, and Western Canada), working rigs were reduced from 694 to 426 in one month, a 38% decline.
When economies around the world resume more normal levels of activity, demand for oil will move up. That is anticipated to be later this year. When that happens, surplus oil will be used and then drilling activity will increase.
At Trust Company of Oklahoma, we manage over 17,000 oil and gas assets in 25 states across the country. This includes producing and non-producing assets: minerals, working interests, royalties and overrides in significant basins where major activity is taking place. Let us know if we can help you navigate the ins and outs of your oil and gas assets.