Why Are Drillers Paying to Get Rid of Crude?

The COVID-19 pandemic has sent shockwaves through the oil and gas market, with prices plummeting in the face of economic uncertainty and a global supply glut. Now, the landscape is so bad that some producers were forced to pay buyers to take oil off their hands in May. This dramatic shift in the oil economy came after oil prices climbed to a high of US$63.27 in early January, only to come tumbling down in the wake of the global coronavirus outbreak.

Panic over May futures contracts

So what sent oil prices into negative territory? On April 20, as May crude oil futures contracts were ending, West Texas Intermediate (WTI) prices tumbled to -US$40 a barrel. Basically, the cost of storing crude oil exceeded the price producers could sell for. As a result, producers were forced to pay buyers to move crude oil offsite. The issue was faced mostly by landlocked oil producers in oil-rich regions such as Texas and Alberta, who rely on pipelines, do not have access to floating storage and have depleted onsite storage capacity.  

“High-cost waterborne crude oil that can reach a ship (storage we have historically never ran out of), are better positioned than landlocked pipeline crude oil sitting behind thousands of miles of pipe, like the crude oils in the US, Russia and Canada,” says Jeffrey Currie, Global Head of Commodities Research at Goldman Sachs.

Analysts warn June could also bring negative territory

Looking ahead to June, analysts warn the negative pricing scenario could return if producers aren’t careful. While an agreement between OPEC and Russia helped to ease the supply glut, the economic impact of COVID-19 and the drastic slump the pandemic has had on oil demand could see a similar situation materialise in June. Other analysts are more optimistic, saying that while prices may experience some weakness, panic has subsided, and negative territory is no longer a risk.

The mood at American multinational investment bank Goldman Sachs is also buoyant, with Currie predicting that production cuts, coupled with a steady increase in demand from recovering economies such as China, could see oil demand rebound enough to outstrip supply by the end of June.

Want to know more about what’s ahead for the energy sector? ‘The Only Certainty is Uncertainty for Corona-Stricken Oil Industry’ explores the economic impact the COVID-19 pandemic has made on the global energy landscape, with commentary from Dr. Raj Shah, David Phillips and Ms. Shana Braff on behalf of Koehler Instrument Company.