There was a worldwide shock when U.S. ended with negative oil prices for May contracts. It dropped to minus 38 dollars a barrel this week, crashing into negative territory for the first time in history.
While demand has dried up as the COVID-19 pandemic paralyzes economies and keeps people at home,… excess supply is in limbo not helped by an intense price war between Russia and Saudi Arabia.
What do these ultra-low oil prices mean for producers and what does it tell us about the world economy as it grapples with the coronavirus?
Today, we’re joined by Dr. Graham Ong-Webb who joins us from Singapore’s Nanyang University and Tony Nash, CEO and Founder of Complete Intelligence.
AN: We start an in-depth discussion with experts from around the world. There was a worldwide shock when US oil contracts for May dropped to minus $38 a barrel this week, crashing into negative territory for the first time in history. While demand has dried up, has the COVID-19 pandemic paralyzes economies and keeps people at home? Excess supply is in limbo, not helped by an intense price war between Russia and Saudi Arabia. What do these ultra low oil prices mean for producers?And what does it tell us about the world’s economy as it grapples with the Corona virus? Today, we’re joined by Dr. Gray Ong WebB, who joins us from Singapore’s Nanyang Technological University. And Tony Nash, CEO and founder of Complete Intelligence.
AN: My first question to you, Dr. Ong-Webb. First, what caused the US oil prices this week to fall to such historically low levels?
OW: Well, we’ve seen the slashing of oil prices all around West Texas and intermediate and global crude oil have plummeted because of the severe price for it occurred over the weekend, particularly led by Saudi Arabia that sought to slash oil prices by about four to seven dollars a barrel. And this price war was triggered by the implosion of the OPEC Plus Alliance a week before between, in terms of the breakdown in the orchestration between Russia and OPEC led by Saudi Arabia trying to come to an agreement about the cut in production. As you know, previously there was no agreement to cut production by 7 million barrels.
OW: But of course, the Russians withdrew from this discussion with the concern that this would be using a lot of space to U.S. shale oil companies to occupy the gap. So Saudi Arabia went onto this price war, which then triggered a cascade into negative territory, which was, as you mentioned, unprecedented in history. But really, I think this is the story about the collapse in oil prices is a confluence of a lot of factors that you can discuss today. This is a very interesting industry, as you know, because of the way the oil sector is set up.
AN: Right. In Russia and Saudi Arabia, they did come to an agreement eventually. But people are saying that the OPEC’s decision to cut oil production came much too late. And while, Mr. Nash, all eyes are now on the futures contracts for June, but that really hasn’t been much cause for optimism has that admit this pandemic can as for calls for a swift economic recovery get thinner and thinner. Actually, some analysts are saying that oil prices for JUne, they could actually fall to minus a $100 per barrel. What’s your take on this?
TN: No, I think it really all depends on how soon economies get back to work. We have a couple of states here in the US, Georgia and Tennessee, that have said that they’ll get back on line very soon, possibly by next week. So if other states follow them, I think you’ll start to see demand pulled and crude oil pulled along with that demand if it gets started. If it gets pushed back in the president’s daily briefing, he just said today that they may consider, you know, pushing some of these social distancing and other requirements further into the summer if the state level economies stay as locked up as they’ve been.
TN: I think it yeah, it could be pretty terrible for crude oil and it could be pretty terrible for most commodities. So, again, it really all depends on how quickly the countries around the world get back to work. And it really depends on the local governments as well as the national governments making those decisions to put people back to work. What’s interesting here in the states is we’ve started to see people protest in cities across the country to get back to work. And so there is a couple of restaurants here in Houston, a couple of businesses around the country that are insisting that they stay open. A restaurant here in Houston will start sitting people this Friday night.
AN: And the businesses may want to go back to normal. But, well, it looks like demand might not pick up quickly, I mean. But then this also isn’t just a U.S. problem as you mentioned. Brent crude has been faring better than U.S. shale for sure, but it’s also taking a hit amid a supply glut lessened by the price for that Dr. Webb just mentioned between Russia and Saudi Arabia. And when in this situation when demand has plunged as much as 30 percent globally and as much as 70 percent in countries like India could Brent also flip negative do you think, Mr. Nash?
TN: Now, look, the reason that Brent that WTI went negative was it’s a function of the exchange that it trades on and on the NYMEX exchange, they let those prices go negative because of, partly because of physical delivery of crude oil. But WTI also traded on the ICE exchange where Brent is traded. And the ICE exchange didn’t let WTI go negative. They let it go to zero. So I think the worst case we’ll see for Brent is a zero price simply because the exchange won’t let the price go below zero or they haven’t let it go below zero. So if ICE, if the Inter Intercontinental Exchange stands in the way of seeing negative Brent prices, then you just won’t see negative Brent prices and they’ll stop trading.
AN: So you think that there might be some kinds of intervention going on there? Dr. Ong-Webb, well, OPEC is due to start cutting supply by 9.7 million barrels per day, and that would be reducing about 10 percent of global supply from May 1st. That is a historic cut. But do you think that’s enough?
OW: I can clearly, the answer is no. Whether you are your own oil expert or whether you’re an observer of markets and how the global economic machinery is moving, or in this case has seized, it’s come to a grinding to a halt. Well, the answer is, as I mentioned, no. I mean, we know for the month of April we’re seeing a reduction in terms of demand by about a factor of three to the agreed all production cuts by the cartels by 9.7 million barrels. Also we’re looking at 30 million barrels less consumed in April. So clearly that’s an indication that first, we have a cuts, if you like, not enough. And there will have to be, whether we like it or not, all cuts along the way, simply because in allusion to his point about storage capacity, which is an important factor in the price equation of oil, is that there’s just no way to put oil anymore. I mean, tankers are filled to the brim. I mean, 60 percent of storage capacity globally is being filled up by the end of April, I think, by the beginning of May, there’ll be just simply nowhere else to put the oil. And so, there will have to be a slash in production. But this is just an easy thing to say because of the complexities of the way in which oil is produced, the infrastructure behind oil. We can’t simply just turn off the taps. And the oil production companies know this, that if fields are closed, they’re just simply difficult to reopen and we’re unlikely to resume them and achieve the prior optimalities in production. I mean, you can get back to those production capacities again. So a lot of push and pull factors at play here.
AN: So really the last major oil export. There is an incredible amount of pressure. And Dr. Ong-Webb, the oil crisis in the mid 1980s actually preceded the fall of the Soviet Union or made the pace rapid. If global oil prices remain around the $20 threshold, then which economies are going to be in hot water?
OW: Well, it all depends, right? So in the case of I mean, maybe Tony could speak to this more than I could about what’s happening in the US. On the reports I’m reading, I think thirty US dollars a barrel would help keep things afloat, literally. $30 a barrel or below, this will lead to more job cuts, especially to minor players in the oil industry are going to fall and lots of medium-sized and small producers in the US. Even in a place like in the Gulf states, where large margins are required because of the government’s subsidies and whatnot. I think quite a few golf econ might also. That it all depends. But clearly, despite the pursuit of more production efficiencies, especially the kind of efficiency we saw come out from all the previous oil slump in 2014, there is this complete collapse in demand and there’s no way of getting around that. And companies are going to fall. Jobs are going to be lost. And we just have to find a way to do to stave this off.
AN: And Mr. Nash, while hundreds of companies in the US, all companies are going to be very hardly hit by this decline in consumer demand, and also this is going to affect thousands and thousands of jobs. How do you think this is going to affect the pace of recovery of the US economy from this pandemic recession?
TN: Yeah, again, I think since this is a global government shutdown, really the pace is completely affected by the rate at which governments release these curves. I think if they don’t release the curves, if they don’t allow people to go to work, I think it becomes more and more difficult to have a quick recovery, even remotely quick recovery.
TN: I don’t want to unnecessarily paint a doomsday scenario, but the longer we stay at home, the longer we don’t allow planes to fly in the sky, ocean vessels to move, we don’t have demand in food markets, demand in other markets, it really damages every industry. It’s not just crude oil. I think that the key thing that we have to keep in mind here is that U.S. crude companies appear to be more damaged simply because they’re more transparent.
TN: Most of the oil and gas companies globally are state-owned, so they’re national oil companies. So there really isn’t the visibility to their performance and their expenses that you get with U.S. energy companies. So make no mistake, those companies are hurting just as bad. And when you look at companies like Saudi Arabia, Iran, so on and so forth, those guys have to be making $60 a barrel or more in order to pay off their bills every month to run their governments.
TN: So while we talk about, say, fracking cost it 20, 30, 40 dollars a barrel, when you look at the fiscal position of many of these Gulf states and even Russia, Russia’s very expensive to operate, until they’re making $60 a barrel or more, they’re actually losing money. So these guys can not afford to play this game very long. And I think they played their card at the wrong time because there’s a global demand problem at the same time that they’re trying to fight this war. So really, they’re hurting the U.S., but they’re really hurting themselves just as bad or worse.
AN: Exactly. And that’s very clear that the historically low oil prices will affect all global players. But it seems that Saudi Arabia and Russia, they all vying for this all supremacy, and Dr. Ong-Webb, just before you go, if that’s the case, do you think it’s worth? And over the coming months, who do you think has the biggest chance of emerging victorious?
OW: Well, it’s really hard to say. I think I agree with Tony that I think there are no winners in this game. And that’s that’s a problem we are facing today. We’re in the new normal. A lot of the previous assumptions or principles that govern competition, economic and political competition, are actually hurting us instead, because a lot of things that we have to do today are counterintuitive. And we are in an unchartered territory. Countries like Saudi Arabia and Russia are simply just following their political strategic instincts, if you like, which have served them well in the past, perhaps, but not anymore today.
OW: And so I think they’re not only going to hurt themselves. They’re going to have a further contribute to the further negative impact on the global economy. Clearly, there will be some winners out of this. If you’re in a storage business, I suppose especially oil tankers, I think its glory days for you right now, maybe momentarily. And of course, you’re energy hungry, oil importer perhaps, some have savings there. But then again, because of the collapse in demand, I mean, not much had either. Until the national economies and the global economy starts to move again and people are moving around naturally and buying things, buying services, I think all of us are going to continue to be hurt.
AN: So really, oil prices are really dependent on demand and we’re not seeing much of that and it looks like it won’t be coming back in in the near future.