US oil costs less than zero after sharp drop on Monday
U.S. oil futures plunged below zero for the first time on Monday, a chaotic demonstration of the diminishing capacity to store all the crude the stalled global economy would otherwise use.
The price per barrel of West Texas Intermediate crude for delivery in May, which closed at $ 18.27 a barrel on Friday, ended at minus $ 37.63 on Monday. This effectively means that sellers have to pay buyers to withdraw barrels from them.
The historically low price reflects uncertainty about what buyers would do even with a barrel of crude in the near term. Refineries, storage facilities, pipelines and even tankers have filled up rapidly since billions of people around the world began sheltering in place to slow the spread of the deadly coronavirus.
Prices remain in positive territory for barrels to be delivered in June. In the most actively traded U.S. futures, crude for June delivery fell 18% on Monday to close at $ 20.43, while oil due to be delivered to the main U.S. mall in Oklahoma in November ended around $ 31.66.
These higher prices, like the recent surge in equities, reflect investor optimism that the global economy will rebound later this year, and that sufficient demand for fuel will return to absorb some of the glut that was forming even before. border closures, factories slowed down and billions of people stopped driving and flying. Still, prices around $ 30 a barrel, which is below the breakeven point for many producers, still suggest economic concerns ahead, some analysts say. “It’s absolute chaos,” said Chris Midgley, chief analyst at S&P Global Platts. “I hate to hear who’s on the wrong side of this.”
Monday’s trading was exacerbated by the looming expiration of the May futures contract on Tuesday. The price of oil futures converges with the actual price per barrel of oil as the contract delivery date approaches.
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The expiration of the contract also flushes out speculators who do not intend to take delivery of barrels of crude. Exchange-traded funds, which control a large number of futures contracts, are among those that must sell on expiration. The forced sale adds downward pressure on prices.
During a press briefing on Monday, President Trump said his administration was once again considering removing oil from the market by injecting barrels into the Strategic Oil Reserve. “Now is the perfect time to buy oil,” he said.
Although growers in Alberta, from Canada to Midland, Texas, are rushing to locked in productive wells, they weren’t able to turn off the tap quickly enough to avoid what energy officials call “hitting tanks” and running out of places to store crude and petroleum products, such as gasoline. and jet fuel.
Even before the price turned negative, spreads between now and later oil deliveries were at record highs, presenting a rare opportunity for traders, who fill tankers with crude and leave them adrift. “If you can find storage, you can make a lot of money,” said Reid I’Anson, economist for market data company Kpler Inc.
Rental rates have skyrocketed for the very large crude carriers, the 2 million barrel ocean going behemoths known as VLCCs.
The average daily rate for a VLCC on a six-month contract is around $ 100,000, down from $ 29,000 a year ago, according to Jefferies analyst Randy Giveans. One-year contracts cost around $ 72,500 per day, up from $ 30,500 a year ago. Cash charter rates have increased six-fold to almost $ 150,000 per day.
Daily rates rise as the spread between oil futures widens. The basic calculation is that every dollar in the six-month gap equals an additional $ 10,000 per day that can be paid for a VLCC during that period without wiping out any oil price gains, Mr. Giveans said. .
Futures on May delivery of Brent crude, the international benchmark generally used for the price of water-borne oil, closed Monday at $ 25.70 a barrel. The contract for delivery in November was $ 36.39. The difference of $ 10.69 is less than the record spread of $ 13.45 reached on March 31, but sufficient to justify a daily rate of $ 100,000.
At the end of March, around 109 million barrels of oil were stowed at sea, according to Kpler. On Friday, it hit 141 million barrels.
The collapse in current oil prices, combined with expectations that much of the economy will resume by the fall, has resulted in a market condition called contango, in which the prices of a commodity are higher. higher in the future than they are now.
One of the great trades of modern history involved an abrupt contango and a fleet of tankers. In 1990, Phibro, the oil arm of Salomon Brothers, loaded tankers with cheap crude just before Iraq invaded neighboring Kuwait and crude prices exploded. Trade architect Andy Hall rose to fame, bought a century-old castle in Germany, and rose to prominence for a salary of $ 100 million. Current market conditions have inspired followers.
In the past four weeks, nearly 50 long-term contracts have been signed for VLCCs, Giveans said. Jefferies has identified over 30 of them as being for storage, usually because they are rented without unloading locations. The South African coast offers a popular anchorage because it is relatively equidistant from the markets of Asia, Europe and the Americas.
“We have seen more floating storage contracts signed for 12 months in the past three weeks than we have seen in the past three years,” said Mr Giveans.
Companies that own and operate pipelines and oil storage facilities could also benefit.
Consider the difference between Friday’s prices for West Texas Intermediate to be delivered in May, which was $ 18.27 a barrel, and May 2021, which closed at $ 35.52: a spread of $ 17.25 could get stuck in buying contracts for oil to be delivered next month and then selling contracts for delivery a year later.
Assuming monthly costs for storage owners of 10 cents a barrel – as analysts at Bernstein Research did when they performed back-of-the-envelope storage calculations in a recent note to customers – and this leaves a profit of $ 16.05 per barrel.
Companies typically do not disclose unused storage capacity, but it is possible that larger players such as
LP could hold tens of millions of barrels, according to analysts at Bernstein.
Write to Ryan Dezember at [email protected]
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