History was set on Monday as for the first time ever the benchmark North American oil price – West Texas Intermediate – fell into negative territory, trading at one point for a minus $37.63 US per barrel.
“This brow-raising result can be attributed to technical factors intersecting with near-term storage capacity issues. In simple terms, what is talked about as ‘the oil price’ is a monthly futures contract that ‘rolls over’ on a monthly basis. The negative benchmark prices seen today (most major North American prices also fell below $0 per barrel) are reflective of the price for the ‘front’ contract, which is currently for May,” said Omar Abdelrahman, Economist with TD Economics.
“The reason for today’s negative prices is thus largely technical in nature. Unlike normal trading days where contracts settle financially, today’s trades settle through physical delivery or are rolled over to the next month. With near-term demand extremely subdued and immediate access to storage capacity limited, last-minute liquidations forced prices into negative territory.”
But he said concerns over storage capacity have been mounting. It is important to note that storage capacity is not yet exhausted in the U.S. The latest Energy Information Agency data showed that net stocks as a percentage of working storage capacity stood at 57 per ent. However, for the key delivery and distribution centre of Cushing Oklahoma, utilization is higher, at around 69 per cent.
“The bottom line is that today’s strange pricing is likely a one-off blip reflecting unusual factors. We don’t anticipate prices to remain at this level. Rather, we expect WTI to average US$20 per barrel for the current quarter as a whole. But, as today’s episode has shown, we are far from the other side when it comes to the demand picture, and a repeat of this episode is possible if no signs of demand normalization emerge,” he said.
Robert Kavcic, Senior Economist with BMO Economics, said it remains clear that the market is awash in supply and pushing against storage capacity limits, with global demand halted.
“For Canadian heavy producers, they’re looking at prices in the low single-digit range. Crisis on top of crisis,” he said.
Alberta Premier Jason Kenney said Monday’s oil price plunge “further underscores the devastating impact of recent events on the largest industry in this province, the largest subsector of the Canadian economy.”
He said because of the collapse in energy prices combined with the COVID-10 crisis hundreds of thousands of Canadian jobs are on the line – 500,000 jobs are connected directly or indirectly to the industry.
Kenney said the industry has paid nearly $370 billion in revenues to governments over the past 18 years.
“We simply cannot afford to see that industry permanently impaired,” he said. “I’ve made this point repeatedly and with continued urgency. We appreciate the measures that were announced by the Government of Canada last Friday including assistance with job creation in the service sector through accelerated well reclamation as well as assistance with investments in methane related technology and a credit facility for small to mid-size energy companies to assist them in getting access to commercial rates of credit so some of them can survive this current crisis.
“But much more action is needed and I join with Premiers from coast to coast and many other key leaders of the Canadian economy including the heads of the largest banks and our financial institutions who understand that is not an Alberta issue. This is not an industry specific issue. That this strikes right at the heart of the entire Canadian economy. If we see the current negative price situation continue for any period of time the implications obviously for this industry are very serious, could not be more serious, and the implications for the Canadian banking sector, the financial services industry, the manufacturing industry, for pension funds, for people’s retirements, right across the country, government revenues that pay for health care and critical public services, could all be jeopardized. And so once again I publicly renew our urgent request for federal action in this regard.”
