The economic slowdown caused by COVID-19 is pushing oil prices down to their lowest level in more than 20 years.
The most current futures contract for West Texas Intermediate lost $6 US a barrel on Monday, going to $11.66 US, the lowest level since 1999. That’s the price for oil scheduled to be delivered in May — a contract that is especially volatile on Monday, since it is scheduled to expire on Tuesday.
Oil for June delivery is currently valued at around $22 a barrel, but it is also down by 11 per cent from the previous day’s level.
The contract for oil to be delivered as soon as next month is plunging because anyone caught owning it for much longer has to find a place to store the oil, a task that’s getting harder and harder of late.
The price is going down because there’s very little demand for oil, and the world is running out of places to store the excess. Storage tanks at the U.S. hub of Cushing, Okla., are now holding 55 million barrels of crude, which is their highest level since 2018.
Storage on land is filling up everywhere, so some producers have taken to storing their excess oil at sea, renting tankers to float aimlessly to store the crude until a higher price or buyer can be found. Rates for the biggest oil tankers have soared as producers scramble to secure space to keep the crude they don’t know what to do with.
“Floating storage remains the only outlet for a mismatched production and consumption backdrop,” Evercore shipping analyst Jonathan Chappell said in a note to clients last week.
The going rate for the biggest oil tankers in the world hit $165,000 a day this weekend, Chappell calculates, but despite that up-front cost, “it is difficult to envision a scenario where floating storage is not economic and required over the coming months.”
Market sending signal
That’s because there’s not enough demand for the stuff that’s already out there. The oil cartel known as OPEC tried to address that earlier this month by promising to pump 10 million fewer barrels of oil every day, but even that huge cut isn’t enough to offset the corresponding drop in demand.
Lockdowns, travel bans and the general economic slowdown associated with the COVID-19 pandemic have reduced demand for oil by about 25 million barrels a day, so OPEC turning off the spigots by 10 million barely makes a dent.
“If your bathtub is about to overflow and you turn down the tap a little, it will still overflow,” oil analyst Bjarne Schieldrop with SEB Research said Monday.
“The oil price is now ordering producers to halt production and it is happening at high speed and in an unorderly fashion. This is creating damage to production and some of it will never come back online again.”
Canada’s oil price plunges
Canadian oil producers are among those in danger of turning off the taps if these prices persist. The type of oil from Canada’s oilsands is known as Western Canadian Select and it typically trades at a discount of between $10 and $15 to WTI, because it is harder to transport and refine.
Alberta Premier Jason Kenney tweeted on Monday that the price of WCS actually dipped into negative territory overnight — meaning Canadian oil companies are functionally having to pay to get rid of their product.
But hedge fund executive Pierre Andurand of Andurand Capital said negative prices make sense in the current climate.
“There is no limit to the downside to prices when inventories and pipelines are full. Negative prices are possible,” he tweeted. “I am not saying it will happen. If it does it would be very short-lived. But just be careful out there.”