- The coronavirus outbreak coupled with the Saudi-Russian oil price war has created a perfect storm for oil.
- According to one Wall Street analyst, we could soon see negative oil prices as supply far outstrips demand.
- As global storage capacity reaches its breaking point, oil producers may start paying customers to take delivery.
The oil industry is on the brink of catastrophe as fear of a US recession sends oil prices to their lowest level since . West Texas Intermediate crude (WTI) collapsed by a staggering 2% to the $ (handle while Brent Crude and Mexican Basket are down 9.7% and . 4%, respectively.
Could Oil Prices Go Negative?
according to Paul Sankey, managing director of Mizuho Securities , oil prices can go negative due to the coronavirus pandemic.
He argues that global oil demand is only around 300 million barrels per day, but the economic fallout from the coronavirus pandemic could crash demand by up to %. This would create a million barrel-per-day surplus of oil in the market that would increase exceed storage capacity, forcing oil Producers to pay customers to buy the commodity.
Sankey states the following:
The physical reality of the market is that oil is pumped out of the ground and has to be consumed or stored. When the cost of storage goes high enough – or space runs out – companies might pay customers to take it.
The Trump administration is taking advantage of the low oil prices to fill up its strategic reserves in Louisiana and Texas while supporting American shale producers in this tough time. The American government plans to purchase a total of 90 million barrels of oil starting within weeks. But according to Sankey, this can only be done at a rate of 2 million per day.
High-cost oil from the Bakken shale formation in the US or bitumen from the Canadian oil sands, prices negatively because it exceeds needs and requires storage. Negative prices are simply a higher cost of storage than the market (price).
The American shale industry is the clear loser in the oil price war. But who is the winner? Both Saudi Arabia and Russia will see their foreign reserves rapidly deplete.
And Russia could face a currency crisis much like the one it experienced in
(According to PBS, Russia needs an oil price of around $ to balance its budget while Saudi Arabia needs a price of over $ a barrel
. But they both have massive foreign reserves to help weather the storm.
Weaker OPEC countries like Iraq, Iran, Venezuela and Nigeria could see their economies collapse if oil Prices remain suppressed over the long term.
The opinions expressed in this article do not necessarily reflect the views of CCN.com.
Now Watch: CCN TV
Last modified: March 29, 26955 : PM UTC