The United States refiners and other crude oil buyers are reworking their contracts to guarantee their supply after many unexpected cut off in reason of trimmed production after price collapsing and OPEC+ meeting agrees to cut back production. Refining industry had a concern about the probability of another steep decrease in oil price as markets around the world are trying to survive from the economic contractions after the outbreak.
Traders and analysts opined that crude oil seller will likely be compelled to agree in buyer’s terms as buyers are scarce nowadays. After U.S oil prices nosedived into around -$37/barrel last April, U.S producers cut their production around 2 million barrel/day, nearly 20% of the country’s daily output. Crude sales agreements between supplier and buyers typically specify a floating benchmark or prices differential. This floating benchmark is changing depending on market prices, but do not specify about volumes to be sold in the clauses. This kind of agreements allows suppliers to hold sales when prices are unusually low. Market sources from oil producers side revealed that buyers nowadays are trying to install the volume thresholds into contracts. With the scarcity of buyers, the seller only has little bargaining power in the lease agreement.
While adding a volume helps buyers guarantee the supplies, but to add such clause changes at times like these feels way too late. Also, the only oil producer who can meet those volume requirement clauses is those with enough flexibility in the cause of massive tank capacity in front of the wellhead. Another source said that while sellers might lose the price benefit now, but some of the added clauses are too ambiguous and concerning that the clauses might be read differently.
A market source disclosed that some producers are currently selling at discounted rates. After failed to deliver in the earlier months when the production was shut, the producers taking action to avoid legal dispute against the buyer with the discount.
Some of the U.S. oil producers had declared force majeure, a clause for an emergency situation as a natural disaster, an act of god, or wars. The clause provides legal cover to them to be disobedient with the contracts, but such dispositions have attracted much criticism from refining groups.
