Oil prices fell below $0 a barrel on Monday, and some energy companies could be forced into bankruptcy as storage reaches maximum capacity. On April 1, CNBC published a report titled “Oil prices could soon turn negative as the world runs out of places to store crude.” The report continued

“Global oil storage could reach maximum capacity within weeks, energy analysts have told CNBC, as the coronavirus crisis dramatically reduces consumption and some of the world’s most powerful crude producers start to ramp up their output.”

The now-defunct May West Texas Intermediate crude (CLK20) expired on Tuesday after plunging––for the first time ever in the oil industry––into negative territory on April 20. The front-month contract settled at negative $37.63 a barrel before a slight rebound. Sellers had to pay people nearly forty dollars to take a barrel of crude, which must be produced, shipped, processed, and then refined for shipment and retail. 

Geopolitical strategist Peter Zeihan, the Saudi oil price war began as a proxy war with the Russians regarding who would carry the burden of a production cut. But, the Saudis now target markets including US shale and Russia, but, also, Kazakhstan and Azerbaijan, Libya, Iraq, Iran, Malaysia, Indonesia, Mexico, Norway, United Kingdom, Nigeria, Chad, and the world. 

If the Saudis can push prices negative, many of the world’s energy producers will go bankrupt. Zeihan suggests one-fifth of global output will go offline for years. If the lockdowns worldwide become a regular event, then that global output might go offline forever. These events transpire in slow motion.

Despite the chaos, the oil market moved higher Wednesday. The most-active West Texas Intermediate crude, CLM20, for June delivery increased +5.33%, gaining $2.21 or 19.1%, settling at $13.78 a barrel on the New York Mercantile Exchange––the lowest level since the late 1990s.

Deutsche Bank strategists Jim Reid and Nick Burns examined oil prices over the past 150 years in nominal price, in order to put this in perspective. “In nominal terms, it’s not a surprise to see that, over the 150 years for which we have data, there’s never been a negative price print before,” wrote Reid and Burns.“This is stunning as it basically says that a barrel of oil earlier this week was effectively cheaper than it was in 1870. A period over which US inflation has risen +2870% and the S&P 500 +31746505% in total return terms,” the analysts wrote.

WTI prices might have shown some resilience––they increased nearly 30 percent to $17 per barrel––but the physical market for crude is still collapsing. There is too much refined oil and refiners must figure out how to store gasoline and jet field at sea. Tanker rates, however, are spiking and available storage is dwindling. So refiners decrease output, while risking needing to shut down entirely. For instance, Bloomberg reports that Royal Vopak NV in Rotterdam, the world’s largest independent oil storage company, is out of storage capacity.

“For Vopak, worldwide available capacity that is not in maintenance is almost all gone and from what I hear elsewhere in the world we’re not the only ones,” CFO Gerard Paulides said.

Petrol demand has plummeted in Europe by 88%. “As global travel restrictions will largely stay in place in May 2020, gasoline demand will remain significantly depressed. Everyone along the supply chain is getting hammered right now, but refiners and traders exposed to gasoline are suffering the most,” Rystad Energy Senior Oil Market Analyst Artyom Tchen stated.

Rystad says that on average U.S. refiners will lose $3 per every barrel of gasoline processed in March and April. “As the end-market for gasoline has only shrunk, refineries face the imminent issue of gasoline storage overflow. If refineries were to continue activity at March 2020 levels, this would result in gasoline storage reaching full capacity as soon as mid-May,” Tchen said. “Instead, refiners are already scaling back operations in an attempt to avoid hitting the gasoline storage wall.” 

Half of the largest 60 independent U.S. oil companies will need to secure more liquidity, according to Reuters

“The restructuring guys are extremely busy. I don’t think they’ll be busy for just this year – I think it’s a multi-year process,” James West at investment bank Evercore ISI told investors on Wednesday.

Even before the coronavirus pandemic, the U.S. shale complex has mostly been unprofitable to date, as supply losses will likely extend into April and May. “Excessive capital allocation and fragmentation in a contained geographical area generates poor returns, and we provide examples for Canada, Australia and the US over the past decade,” Goldman Sachs analysts said on Tuesday. 

Norway’s Equinor was the first major oil company to cut its dividend, cutting it two-thirds down to $0.09 per share. 

Oil companies globally are expected to follow suit, though the American oil majors have conveyed a stubborn refusal to touch dividends. Chevron and ExxonMobile will announce first quarter earnings on May 1. Faith Birol, the head of International Energy Agency, suggested on Wednesday that OPEC+ might need to make further production cuts. “It is important that they cut as soon as possible and consider further cuts.” Birol said on Bloomberg TV. 

On April 23, a British Petroleum-led project in Azerbaijan, the $38 billion Azeri-Chirag-Gunashli (ACG) project, announced that it too will have to cut production in May for the first time as Azerbaijan will need to alter production to meet its new quota under the OPEC production deal, sources told Reuters on Thursday. 

Azerbaijan will need to work with partners such as BP, Equinor, Chevron, and ExxonMobile, as well as Azerbaijan’s state-run oil company, SOCAR. The project, put into production in 1997, could hold 5.4 billion barrels of recoverable oil.

Zeihan predicts that a price crash will happen again, only bigger. “The April 20 price crash will happen again in the same place and it will be bigger: June WTI futures contracts are now spazzing, and America’s Cushing oil storage and transport nexus undoubtedly will be actually full by then,” he wrote. “But even this is nothing but the warmup for the big show.”

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