Crude oil: Fears of negative prices, and the first major shale bankruptcy

on Apr 1, 2020
Updated: Apr 10, 2020
  • Crude oil inventory rises the most since 2016
  • Shale oil producer Whiting Petroleum Corp goes bankrupt
  • Oil storage capacity could soon top out

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Even as Goldman Sachs warned that global oil demand could plunge by 18.7 million barrels per day in April, U.S. shale producer Whiting Petroleum Corporation (NYSE: WLL) filed for bankruptcy.

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Whiting became the first major U.S. shale producer to seek Chapter 11 protection. Its board of directors attributed their decision to “the severe downturn in oil and gas prices driven by uncertainty around the duration of the Saudi / Russia oil price war and the COVID-19 pandemic.”

According to analysts, shale oil drillers face a cost of production on average between $35 to $40 per barrel. In the current market environment, when WTIC, the New York crude benchmark, hit an 18-year bottom of $19.27 on Monday, a third of shale oil drillers could go bust.

Massive inventory buildup of crude oil

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Meanwhile, reflecting the unprecedented demand shock that has afflicted crude oil, the Energy Information Administration reported a staggering inventory build of 13.8 million barrels for the week to March 27. Analysts had expected a build of only 4 million barrels.

This was also the biggest weekly rise in inventory since 2016, caused by refinery production cutbacks amidst plunging gasoline demand.

“COVID-19’s impact on refineries is finally showing, with runs at just over 82% of capacity, way below the norm for this time of year,” analyst Barani Krishnan said. The analyst attributed the cause to “the sheer immobility of the U.S. motoring and commuting public now.”

Refining cracks turned negative

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Gasoline and jet fuel margins plunged last week to their lowest levels in over a decade, after being in a tailspin ever since the price bashing broke out between Saudi Arabia and Russia. The RBOB (Reformulated Gasoline Blendstock for Oxygen Blending) Gasoline Crack for April futures plunged from $20.73/barrel on February 19 to a multi-year low of -$3.21 (i.e. negative) on March 24.

More on negative prices

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Crude oil prices have wilted from the double whammy of demand destruction due to the virus, and the supply shock from warring producer countries. Now the industry must contend with another grim logistic: storage, both onshore and offshore, could run out within a matter of weeks.

Goldman Sachs warned that crude oil must be contained within its production infrastructures such as pipelines, ships, terminals, storage facilities, refineries, and distribution networks – “all of which have relatively small and limited spare capacity.”

If storage runs out, crude prices may well turn negative. “Indeed, given the cost of shutting down a well, a producer would be willing to pay someone to dispose of a barrel, implying negative pricing in landlocked areas,” Goldman analysts said.

Bloomberg reported last week that crude prices did actually turn negative in one sector of the U.S. physical oil market – Wyoming Asphalt Sour, a dense oil used for producing bitumen – was bid a negative 19 cents a barrel in mid-March.

Trump to meet the U.S. oil industry on Friday

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Meanwhile, the Wall Street Journal reported that President Donald Trump will meet with top oil industry executives on Friday. The agenda for the meeting is to discuss assistance to the industry.

At the time of writing WTIC crude oil futures are up 4.20% to $21.34.

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