Analysts warned of negative oil prices as the world is expected to run out space to store crude soon. The limited availability of crude storage space is a result of diminishing demand and excess supply. Governments across the world restrict travel, prohibit flights, and shut factories as par of their draconian measures to curb the coronavirus spread.
At the same time, the OPEC+ agreement to curb oil output expired on Wednesday, with members failing to agree on terms to extend the pact. Saudi Arabia pledged to increase its oil export and production to a record level, igniting a market share war that threatens to flood the market with even more supply.
According to analysts at Eurasia Group, this would lead to a glut where global inventories reach their maximum capacity within weeks. Analysts at JBC Energy said that about 20% of the world’s VLCCs might soon become floating storage, but it would not be enough to absorb the glut.
This massive glut creates a scenario where prices of some crude grades may drop below zero. This bizarre phenomenon happens when oil producers run out of storage space and need to hand buyers some money to take the barrels from them.
While benchmark prices such as Brent and WTI still trade above $20/barrel, physical crude oil prices in some markets have plunged further below such a level. Last week, Bloomberg reported that a crude grade from Wyoming was recently bid at minus 19 cents/barrel.
This market environment will eventually force producers to cut their output, analysts said. Major oil giants such as Saudi Aramco, BP, Chevron, and ExxonMobil have announced their plans to cut spending this year. Goldman Sachs expected the oil industry would lose about 5 million bpd of oil supply capacity. Oil producers will be likely to shut down older, less productive oil wells.
However, this might pose another problem in the future. When the pandemic ends and demand recovers, the oil production might not be as high as before due to wells shutdowns. According to Goldman Sachs, this could shock the market with a significant price increase.
