Monday, April 20, 2020 was a historic day for oil market. West Texas Intermediate (WTI) closed below zero for the first time. An interview with the Iranian president of Vienna Energy Research Group, Fereydoun Barkeshli to know why US oil is worth less than nothing under President Trump and coronavirus pandemic.
What is going on?! How do you explain this unprecedented crash down?
Never in the last 100 years since oil was traded internationally, crude prices of any grade collapsed so sharply in a way that moved even into negative territory. This means to say that oil men offered crude oil-free to whoever wanted to take it. However, it is needless to say that market experts had long warned that excess supply over demand and consumption is a reality. World oil and products storage capacities and facilities are estimated at nearly one billion barrels. This includes the entire world storage capacities socks in terminals, refineries, pipelines, and final consumer’s storage, plus floating storage and vessels around the world.
Capacities available with SPR (Strategic Petroleum Reserves) are not quite known and considered confidential.
Who should be blamed? or let ask why should the US President be blamed?
In fact, one reason for crude oil prices crash in the US is the fact that President Trump had opted to buy and store some oil and hoard in US SPR facilities. Trump had earlier released oil from SPR in order to ease oil prices in late 2018-19 in order to deliver cheap gas oil for American motorists. America is addicted to cheap oil and gas. A President wins well when petrol is relatively cheap and can fill tanks and drive.
What about the coronavirus pandemic? How did it play a role in this scenario?
Coronavirus suddenly stopped all vehicles driving in highways and halted flights.
However, the Democratic Party- dominated Congress opposed allowing the President to buy oil to fill up SPR facilities. Congress argued that the President released oil from SPR which is meant for an emergency. SPR is designed to be used during wars, hurricanes, floods…SPR is not for commercial or domestic objectives.
As such Trump was unable to buy oil from producers to store in SPR. This time President Trump asked producers to seize production and in fact, keep and store their crude oil under the ground instead of bringing crude up and run through pipelines that were already loaded with unsold oil.
It is important to note that the United States has to still import crude oil from other countries including Canada, Mexico, and Saudi Arabia. It is about crude quality. Shale oil and WTI are graded as super light crudes. These very light crudes with an API of over 50 degrees are usually mixed with heavy crude oil from imported crude grades of 24-27 API degrees. Other than that, very light crudes are suitable to be refined as jet fuel.
US air navigation is a huge industry and business. The number of flights that are carried out within the US airspace is about 22 times flights around the earth. Coronavirus has now stopped that. America does not need all that super light crudes.
What about types of crude oil traded on the market?
In fact, Brent’s price isn’t doing that bad at all. At a time WTI is available at 1Cent, Brent is touching low $20 per barrel. Dubai grade oil is even better-off.
In this context, oversupply is hitting small and medium oil (and gas) companies that often work on loans from banks. They’re not able to cover costs of production and fill up bankruptcy chapters one after the others. International Oil Companies IOC’s are doing well.
They’re all over the world and make their own profits.
How will/can OPEC react?
As we have discussed before, Coronavirus hit the international economy hard and amongst all sectors of the economy, oil is hit worst. When there’s no tourism and traveling, cars, airlines, buses, and trains are parked and use up no gasoline. Demand is broken down and supply is in abundance.
OPEC plus decided to cut output by 9.7 Million barrels on an emergency meeting of ministers on April 9. However, decisions will be effective for two months of May and June, after which OPEC plus ministers meet again and evaluate the market. There’s every possibility that they may even moot earlier and go for a dipper production cuts.
Nevertheless, there’s still an unresolved issue. United States is required to be a party to the OPEC plus agreement. However, domestic regulations in America does not permit market management in order to manipulate prices. The US has to find a way out of the dilemma.
In the meantime, President Putin has called for an extraordinary meeting of five permanent members of the United Nations Security Council in September and has been welcomed by all members. Energy is an important topic among other issues.
The market is currently watching three men namely Mohammed Ben Salman, Putin, and Trump. The three of them hold the key to supply management which is now of crucial importance to market fundamentals.
OPEC misses the presence of Iran most dearly. In past Iran was instrumental in crisis management within OPEC. The country is a founding member of OPEC and an important producer, however, its presence in the world oil market has been restricted under US sanctions.