All eyes were on U.S. oil as predicted prices plunged below zero for the first time ever on April 20. West Texas Intermediate crude, the U.S. benchmark for crude oil, dropped more than 300%, to negative $37.63 per barrel. This means producers and holders of physical oil will pay customers for buying oil.
After ending the market session on April 17 at $18.27 a barrel, the drastic drop in the next trading day was bolstered by uncertainty of what buyers would be able to do with a barrel of crude in the near term.
As the coronavirus has wreaked havoc on demand, oil storage has been pushed to all-time highs. Refineries, pipelines, ocean tankers and other storage facilities have reached capacity rapidly as worldwide quarantine measures have been put in place.
These shelter-in-place orders, designed to slow the spread of the coronavirus, have caused a sharp decline in transportation-demand, in turn driving up the need for storage of oil, even as output was cut.
“At the end of April there were about 109 million barrels of oil stowed at sea. By Friday [April 17] it was up to 141 million barrels,” the market-data firm Kpler Inc. reported. Producers have simply run out of places to store excess barrels of oil.
It is important to note that while WTI suffered a 306% fall, Brent crude fell only 9%, ending April 20’s trading session at $25.57 per barrel. Brent is the international benchmark for crude oil and consists of oil from the North Sea in Britain. Unlike WTI, Brent is settled in cash instead of physically, which will be an important factor in April 20’s fall of WTI.
Much of the storage capacity issue can be traced to Cushing, Oklahoma, and intermingles with the fact that WTI futures contracts for May expire on April 21. The price of oil futures converges with the price of actual barrels of oil as the delivery date of contracts nears.
On the expiration date of futures contracts, buyers are required to take delivery of the oil in Cushing. However, inventories in Cushing have “surged by almost 50% in a matter of weeks and storage capacity soon will be exhausted,” leaving buyers with nowhere to store the oil they agreed to buy, according to The Wall Street Journal.
Oil traders rushed to sell future orders due to expire on April 21, in order to avoid having to take a physical delivery, fueling the chaotic trading session.
Traders are now looking offshore for storage capacity, with lease rates for large crude carriers soaring. VLCCs, carriers with capacity of approximately 2 million barrels, have experienced one of the largest increases.
“The average day rate for a VLCC on a six-month contract is about $100,000, up from $29,000 a year ago,” Jefferies analyst Randy Giveans said. “Yearlong contracts are about $72,500 a day, compared with $30,500 a year ago. Spot charter rates have risen sixfold, to nearly $150,000 a day.”
The price collapse, incited by storage capacity issues, has forced producers across North America to shut off active wells. As U.S. producers turn off the taps, they will bear the pain in the short-term, while players with unused storage capacity reap high profits.
