US land-based storage tanks nearing maximum capacity, record imports of Saudi crude oil and a domestic over-supply of crude oil to demand were some of the conditions that led traders to dump futures contracts at record low prices
The crude oil tanks at the key Cushing pipeline hub in Oklahoma are close to capacity. It is such an unusual situation pipeline operators are worried crude oil in their pipelines will not find a tank to fill, leaving the risk of the pipeline being blocked with crude oil that has now where to go. This blatant lack of demand for crude oil caused panic among derivative traders holding futures contracts for West Texas Intermediate (WTI) crude oil for May delivery.
Normally, the settlement of the price a month before physical delivery passes without drama. In theory, there has to be an underlying physical price to derive the derivative (futures) price and, in theory, a trader still holding the contract at that point has to physically take delivery of the crude oil. With demand for crude oil clearly so low in May, futures traders were willing to take a big hit to sell off contracts rather than take delivery of crude oil that no one wants and for which there may be no storage available, producing the negative US$37.63/bbl.
The price of WTI for June delivery is still positive at US$22.12/bbl and Brent crude oil is US26.21/bbl as at the end of US trading on 20 April 2020.
While the negative flash-crash of WTI crude oil price is a US-specific technicality, it reflects globally that the 9.7M b/d crude oil production agreed by OPEC+ and its allies is having little impact on reducing supply. There appears to be two main reasons. First, due to the shrinkage in air travel and commuting from the Covid-19 pandemic lockdown across most of the globe, demand for crude oil has shrunk by at least 15M b/d with some estimates at double that figure. Which is a drop in demand by a third compared to the global production of crude oil of approximately 100M b/d. The USA is estimating to be producing 2M b/d more than its own consumption during the Covid-19 pandemic.
The second reason is that the full details of the OPEC+ and allies deal has not emerged. Some news agencies are reporting that the 9.7M b/d production cut is based on historical data from 2017, when production was higher. It is known that the cut will not commence until May but Saudi Arabia seems to be pumping as much oil as possible into the market before then.
According to TankerTrackers, an oil-on-the-water data service, Saudi Arabia delivered 366,000 b/d in February 2020 to the USA. This rose to 830,000 b/d in March and in the first two weeks of April, Saudi Arabia has delivered 1.46M b/d. Saudi Arabia reports it is delivering far less and is only servicing the 600,000 b/d Motiva refinery at Port Arthur, Texas. President Trump said on 20 April he might limit US imports of crude oil from Saudi Arabia.
Having seen the first ever negative crude oil price, the industry could witness the first time available oil storage on land and at sea is occupied. The USA and other countries have strategic oil reserve space available, but it is not known if these will be made available for commercial crude oil. At Cushing and other crude oil storage hubs, the facilities are approaching capacity, as witnessed by the panic seen over the futures price. At sea, the situation is harder to access. Replying to a question on the tanker situation during a webinar this week, Poten & Partners senior tanker analyst Erik Broekhuizen estimated there was around 500M barrels of floating storage among the available VLCC and Suezmax tanker fleet and this could be filled within a month at the current rate of crude oil over-production. What happens when all the storage is full?
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