The coronavirus pandemic, which caused a global lockdown and caused the global economy to take a hard hit, has also contributed to a crash in oil prices. The slash in global oil cut prices so low that prices closed negative in April and sellers holding U.S. crude contracts were facing -$37 a barrel pricing.
Signs indicate that the oil market may not stabilize for months. American companies are now seeing that the market they are supplying is deflating at a rapid pace. Frank Verrastro, of the Center for Strategic and International Studies, said, “The supply-and-demand balance for oil is so out of whack that global demand cannot grow fast enough and suppliers can’t cut supply quickly enough to put things back in order.”
President Trump tweeted that he has instructed the Secretary of Energy and Treasury to come up with a plan to make funds available so that the U.S. Oil and Gas industry doesn’t get affected.
The cost of a barrel of oil is surprisingly low, considering the fact that many domestic producers need prices around $50 to $60 to make a profit. West Texas Intermediate crude has been trading for around $13 a barrel for a contract after dropping to as low as $6.55. Brent futures were selling at $19 which has been its lowest in more than 18 years.
The prices for a barrel of oil began dropping this year in January and have gone below zero during April.
The surplus of oil has led producers to store the barrels in giant tanker ships, and according to the Wall Street Journal, about 10 percent of the world’s oil tankers are being used for storage. Not to mention that there are an estimated 40 million Saudi Arabian barrels on the way to arrive on U.S. soil, which would add to the tens of millions of barrels that are already stored.
None of this is helping Californians at the pump, as prices have remained relatively stable near $3 per gallon. In some states, gallon prices are below a dollar.
Aaron Brady, the vice president for energy oil market services at IHS Markit, said, “If you are a producer, your market has disappeared, and if you don’t have access to storage, you are out of luck.”
Contracts for West Texas Intermediate were set to expire this month, which would force their holders on the contracts to unload oil as a complete loss in profit. However, their contracts for the month of June are set to be doing slightly better, since they are selling at around $16 a barrel. This price is still considerably low, as it does not reach the break-even mark for many oil companies.
Major oil companies have decided to start cutting back spending on construction of new wells by 50%, while oilfield service companies are doing similar cutbacks by laying off more workers during this oil crash.
If the cutbacks aren’t enough for some companies, others have just come to a complete halt and have shut down wells. This is taking a huge hit financially on their part. While cutbacks may be a good move, some traders still consider oil will have value by late spring.
With June prices continuing to be at $20, it could be devastating for North American shale companies. Still, some economists think that the June price won’t hold steady enough.
Oil companies will continue to keep pumping even if they lose money. It’s a way to pay interest on their debts to be somewhat stable.
According to the Washington Post, on April 12, members of the Organization of Petroleum Exporting Countries had agreed to cut production by 10 million barrels a day, which is equivalent to 10% of the global output of oil.
Some companies have reported substantial losses and could be seeking bankruptcy protection within the coming months. Halliburton, a giant provider of equipment, workers, and services for oil companies, has already reported $1 billion in losses just this year.
