‘The death of US shale:’ Oil prices turn negative as coronavirus plunges market

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Prices for US West Texas Intermediate (WTI) oil plunged below zero on Monday meaning producers are paying buyers to take crude off their hands as fears run rampant that storage capacity will run out amid market oversupply due to the coronavirus pandemic.

WTI contracts for crude set to be delivered next month hit a low of -$40.32 per barrel, a first for the benchmark, as traders rushed to offload ownership. Anyone left owning WTI when trading on the contracts close will have to take physical ownership of the crude with little storage left at the US oil hub in Cushing, Oklahoma.

“Today’s WTI sell-off has been brewing since last Wednesday when the EIA announced a record 19 million bpd crude build. Given this current pace, the remaining 21 million barrels of Cushing storage is almost certainly going to get filled up in May 2020. Now, it’s not a question of if, but when,” said Rystad Energy’s Oil Markets Analyst Louise Dickson.

Not all oil prices turned negative on Monday, however. Brent crude futures, the leading benchmark for around two-thirds of oil, fell to around $26, down only 7.5 percent. Brent is more resilient to storage problems than WTI as it can be transported by sea, compared to the landlocked hub in Cushing.

“Today’s historic crash in oil prices is more of a reflection in what is happening in the physical market. The world is running out of places to store crude and with the May contract for WTI crude is expiring tomorrow, this technical distortion is seeing the value go deep into negative territory,” said Edward Moya, senior market analyst at trading firm OANDA.

Oil prices will likely see some normalcy tomorrow, April 21, once contracts for June take over, but the crash into negative may prove poor for crude in the short-term.

“Oil prices will remain under duress until oil producers shut-in production. The June WTI contract is holding onto the $20 a barrel level but no one would be surprised if prices fell to the mid-teens this week,” Moya added.

Shale oil on the brink

The ramifications for the US oil industry will be drastic, with shale oil producers pushed to the brink. Shale oil producers have already been suffering with the fall in oil prices since the coronavirus crisis began to effect the energy market, with some already falling to bankruptcy, and others closing production down.

“What does that mean? That pricey shut-ins or even bankruptcies could now be cheaper for some operators, instead of paying tens of dollars to get rid of what they produce,” Dickson later commented.

Oil well shut-ins, an industry term for shutting down production, would still have long-lasting impact on the market – particularly for US shale producers.

“This is sadly the story that will mean the end for many of the smaller oil drillers in the US … The death of US shale appears to be here as shut-ins across the board will mean some wells won’t come back,” Moya concluded.

The world’s top oil producers pulled together a historic deal last week that should remove about 20 percent of current oil production from world markets to face up to the evaporation of global demand caused by the coronavirus pandemic.

Oil prices have continued to fall since the deal was signed however, with Saudi Arabia and Russia, two of the largest oil producers in the world, both saying Sunday they are open to further output cuts to stem crude’s downward spiral.

Meanwhile, the US oil industry remains undecided on output cuts. The Texas oil and gas regulator is due to decide Tuesday if it will mandate supply cuts, the state accounts for 40 percent of US production.

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