The Great Oil Price Collapse – April 27, 2020
On Monday, April 20, the U.S. benchmark price for oil, West Texas Intermediate crude oil5, finished the day at -$37.63 per barrel. Yes, that’s a negative sign in front of the price.
By week’s end, the price closed at $16.94. We can go back to 1870 and not find oil priced below $0.00 (Deutsche Bank, Global Data).
How can a commodity price less than zero? Fears that oil storage facilities will soon fill up forced holders that would receive physical delivery of oil in May to PAY someone to take the oil off their hands.
Broadly speaking, the collapse in oil prices is tied to cratering demand for the once valuable commodity amid economic shutdowns around the globe. The decision by OPEC+ to cut production by about 10 million barrels per day (bpd) seems to be too little too late.
Pre-crisis, the International Energy Agency estimated world demand at about 100 million bpd. In the second quarter of 2020, the IEA believes demand for oil may fall to less than 80 bpd. It’s below the U.S. Energy Info Admin’s (EIA) estimate of about 88 million bpd. However, some sources suggest demand will hover near 70 million bpd (Reuters).
Oil companies are still pumping, at least for now, supertankers filled with oil are stuck off the coast of California (Bloomberg News) and soon, there may be little room to store it.
Economic boon or bust
In past decades, falling gasoline prices were an enormous benefit to the U.S. economy. But over the last decade, the U.S. has emerged as a net oil exporter per EIA data.
The latest study by the American Petroleum Institute (conducted by PwC) sums it up this way. In 2015, the U.S. oil and natural gas industry directly created 2.8 million jobs. Indirect employment totaled 7.5 million. Add the two together and oil and gas accounted for about 5.6% of total U.S. employment. Income totaled $714 billion or 6.7% of U.S. income.
Not all of these jobs are at risk. Still, a survey last month by the Kansas City Federal Reserve concluded that over 50% of U.S. energy firms could go bankrupt if oil hovers around $30/barrel over the next one-two years.
That said, an economic recovery and a phasing out of lockdown restrictions could get drivers back in their cars, aiding consumption without sending gasoline prices too high. A cost of a fill up might still be reasonable without the damaging impact of today’s rock-bottom prices.
Created 2020-04-27 14:40:04