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The extent of how damaged the energy industry is became apparent on April 20, when the benchmark price for US oil futures. Never falling below $ 10 a barrel in its nearly 40-year history, the US fell to an unthinkable minus $ 38 a barrel.
In just a few short months, the coronavirus pandemic has destroyed so much fuel demand as billions of people cut back on travel that has done what financial shocks, recessions, and wars have never accomplished: leave the United States with so much oil there was nowhere to put it.
While the unusual circumstance of negative oil prices may not repeat itself, many in the industry say it is a harbinger of gloomier days ahead, and that years of overinvestment will not be corrected over a period of weeks or even months.
“What happened in the futures contract the other day indicated that things are starting to get worse earlier than expected,” said Frederick Lawrence, vice president of economics and international affairs for the Independent Petroleum Association of America.
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“People are getting warnings from pipeline companies that they can’t take their crude anymore. That means they will shut the well down yesterday.”
Evidence of the erosion of the value of a product that has been a mainstay of global society since the late 19th century abounded around the world last week.
In Russia, one of the world’s leading producers, the industry is considering turning to burning its oil to remove it from the market, sources told Reuters.
Norwegian oil giant Equinor cut its quarterly dividend by two thirds. Next week will bring earnings reports from the world’s largest oil companies, including Exxon Mobil Corp, BP PLC, and Royal Dutch Shell PLC. Everyone is expected to detail additional spending cuts, and investors will be on the lookout for how those companies plan to manage dividends.
US billionaire Harold Hamm’s Continental Resources Inc dispatched servers to fields in Oklahoma and North Dakota in the middle of the week to abruptly close the wells, and the company stated that it was unable to deliver crude to customers due to the poor economy.
Continental’s decision to declare force majeure, generally reserved for wars, accidents or natural disasters, came as a surprise, prompting a sharp response from the leading refinery industry group. But some say there is a logic behind this, even if it is not approved in court.
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“You sign contracts based on the average standards a society has experienced in the last 100 years. If we have a new event that is not covered by those standards, it goes into greater force. That’s what Harold Hamm and others say: these these are circumstances outside the norm, “said Anas Alhajji, a Dallas-based energy market expert.
Even the decision rumored by the White House to tell Chevron Corp last week that it could no longer operate in Venezuela, where it has had a presence for nearly 100 years, shrugged.
“The global climate is terrible,” said a person close to a western oil company in Venezuela. “The license hardly mattered anymore.”
The market is forcing the hands of all producers. Around the world, governments and companies are preparing to shut down production, and many have already started.
The Organization of the Petroleum Exporting Countries and its allies have already pledged to cut a record 10 million barrels of daily supply that have yet to take full effect. That commitment was not enough to prevent oil from falling below zero.
Saudi Arabia said so and other OPEC members are prepared to take further action, but made no new commitments. It is a measure of the depth of demand destruction that even if OPEC stopped producing entirely, supply can still exceed demand.
Over 600,000 barrels per day have already been announced in production cuts in the United States, along with another 300,000 bpd of closures in Canada. Brazil’s state-owned Petrobras has cut production by 200,000 bpd.
Azerbaijan, part of the group of nations known as OPEC +, is forcing a group led by BP to cut production for the first time. Big oil companies in those countries have generally been excluded from government-imposed cuts.
“We have never done this before since they arrived in the country in 1994 and signed the contract of the century,” a senior Azeri official told Reuters.
That accommodation can no longer be done with the world without space to put oil. As of Thursday, energy researcher Kpler said that ground storage worldwide now has approximately 85% of its capacity.
Demand is expected to decrease by 29 million bpd in April, the International Energy Agency estimated. The Paris-based IEA expects consumption to rise in May, but the researchers cautioned that their expectation of just a 12 million bpd drop in year-on-year demand may be overly optimistic.
“I’m sure you hear the same numbers on the destruction of demand for 20 to 30 million barrels a day,” said Gene McGillian, an analyst at Tradition Energy, who was working on the New York Mercantile Exchange when crude oil futures launched. from the United States in 1983. “Until we see some kind of relief from that, you have to ask yourself what’s in the store.”
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