Low fuel prices displayed on a pump at a petrol station in Texas on April 13. Photo: EPA-EFE
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https://scmp.com/news/world/united-states-canada/article/3080785/oil-prices-go-negative-and-washington-paralysed United States & Canada
Oil prices go negative – and Washington is paralysed over what to do
- Reports that Trump administration was considering paying companies not to pump oil have not comforted oil executives
- One CEO warns that ‘tidal wave of bankruptcies’ is about to hit sector
A pump jack from Signal Hill Petroleum is seen in California in October. Photo: AFP
This story is published in a content partnership with POLITICO. It was originally reported by Ben Lefebvre on politico.com on April 20, 2020.
Airlines, restaurants, retailers, farmers and a slew of other industries are getting billions of dollars in bailouts as the US economy contracts because of the coronavirus pandemic – but America’s oil companies are hitting a dry hole.
US oil futures prices fell to their lowest-ever level on Monday at 1 cent per barrel, breaking the previous record near US$10 set in 1986, as policymakers struggled to address the glut of crude that has seen the industry reverse a decade-long boom and sink into a deep recession that threatens to push dozens of companies into bankruptcy.
US policymakers for decades have focused their policies on ensuring the oil supply shocks that damaged the US economy in the 1970s would not return, and they created a national reserve to backstop the market and ensure supplies were available to fill up the nation's fleet of cars and trucks.
But with US production hitting record levels late last year and storage tanks now brimming with fuel, Washington has few tools at its disposal to lift oil prices to levels needed to sustain the energy industry.
“The US government's ability to fundamentally change this situation are minimal,” said Raymond James oil analyst Pavel Molchanov. “The real problem is the fact that upwards of 20 per cent of global oil demand is currently offline, mainly due to the Covid-related lockdowns.”
President Donald Trump won praise last week for helping push Russia and Saudi Arabia to end a market stand-off and reduce shipments of oil. But those cuts will not take effect until next month, hurting near-term prices for crude and leaving oil producers scrambling to find storage for their production.
A White House spokesperson referred questions about any new efforts to aid the oil industry to the National Security Council, which did not respond. A Department of Energy spokesperson did not reply to questions.
After Congress rejected an Energy Department request for US$3 billion to buy oil to top off the nation's Strategic Petroleum Reserve, the agency altered course and is now allowing companies to lease space in the facilities for 30 million barrels of oil.
But even that amount, as well as another 47 million barrels that could flow into federal storage in the coming weeks, will do little to sop up the extra production that is adding more than 2 million barrels per day to private storage tanks.
Reports that the Trump administration was considering paying oil companies not to pump oil under a plan that would reclassify those supplies still in the ground as part of the nation's strategic reserves have not comforted oil executives.
Dan Eberhart, chief executive of oil services company Canary, dismissed the talk of paying drilling companies to keep the oil in the ground as mostly “headfakes”.
“A tidal wave of bankruptcies is about to hit the sector,” Eberhart said.
A refinery in Corpus Christi, Texas, in March. Photo: AFP
US May crude oil futures sunk under US$6 a barrel as traders were forced to roll out of their investments ahead of the contract's expiration. The active June contract was down about US$2.50 to US$22.60 a barrel.
And industry officials who have met with the White House have previously said that administration officials have assured Saudi Arabia that the federal government would not directly aid US oil and gas companies, and would instead allow the market conditions to drive business decisions to reduce the oversupply in the market.
Opec, Russia and a group of other producers agreed to cut production by 9.7 million barrels per day starting in May, and producers in the US and Canada are shutting down wells in a retrenchment that is expected to remove millions more barrels in the coming months.
Until that supply shrinks or there is a rebound in global demand – which is estimated to have declined by 20 million to 30 million barrels per day – there is little chance the industry will return to firm footing.
To make matters worse, a group of oil tankers that left Saudi Arabia before the country agreed to cut production is currently heading toward the US. That oil will further strain storage capacity unless another country buys them before they reach the US.
“It’s like some movie from the 1980s where the US president and the Soviet premier come to an agreement” to halt a nuclear war, "[but] one plane missed the call back”, said one industry official tracking the ships but who was not authorised to speak to the press.