On April 20th America, the world’s biggest producer of crude, found itself in an unusual situation: its oil was less than worthless. The price of the benchmark West Texas Intermediate (WTI) futures contract crashed into negative territory for the first time in its history. The slide is the result of both global phenomena and local conditions. Around the world the supply of oil far exceeds demand for it, as governments try to limit the spread of covid-19. Citizens are no longer driving to work; planes remain on the ground. Steps to restrain production and support prices have been grand in scope but so far limited in effect.
On April 12th the Organisation of the Petroleum Exporting Countries (OPEC) and its allies agreed to cut 9.7m barrels a day from the market in May and June, a record and equivalent to about 10% of global supply. However, even assuming that members of the alliance stick to the deal, which history suggests they may not, demand is already plunging further. The International Energy Agency expects demand may sink by 29m barrels a day this month.
This mismatch is a particular problem for landlocked American production. In March and April American producers continued to pump, even as refineries refused their oil and storage tanks filled quickly. April 21st is the last trading day for oil to be delivered in May to Cushing, Oklahoma, the physical hub for futures traded in New York. The plunge in WTI on April 20th reflected the panicked realisation that oil may have nowhere to go.
Not every oil producer faces so acute a problem. The international benchmark, Brent crude, which is produced in the North Sea and can more easily be placed in tankers, has fallen steeply, but not as far as WTI. Indeed tanker rates have soared as producers and traders seek to fill ships with crude. Spot charter rates for crude tankers in early April topped $200,000 a day, according to Morgan Stanley, compared with about $40,000 a day last year. Such rates reflect some traders’ bet that they can wait out the price slump at sea.
In the meantime, many shale companies will feel the pain, despite the best efforts of Donald Trump. America’s president helped broker the OPEC deal and insisted last week that the industry would recover “far faster” than anticipated. Mr Trump is now reportedly weighing a plan to pay frackers to keep their oil below ground. That idea may win him support in Texas and North Dakota, but Congress is unlikely to approve it. The legislature already rejected an earlier proposal to buy American crude for the country’s strategic petroleum reserve.
More companies may keep their oil below ground, whether Mr Trump pays them or not. Since the crisis began Canada, Iraq and Venezuela have accounted for the majority of production shut-ins, according to Rystad Energy, a data firm and consultancy. Producers often continue to operate at a loss rather than halt output, as it can be costly to restart operations and a shut reservoir may be damaged permanently. Shale operators have been loth to accept that fate. Soon they may have no choice.
This article is from our Graphic detail section.