The day oil was worth less than $0 — and nobody wanted it
Are oil prices really negative? And how is that possible?
During these extraordinary times of the COVID-19 pandemic, a few hours can seem like a few days, and last week can feel like last month. For those in the oilpatch, the heady days of 2014, when oil prices were above $100 US per barrel, must seem like a century ago.
The markets have been excessively volatile since the pandemic began, but on Monday the truly unthinkable happened — oil prices turned negative.
Alberta's oilpatch history is full of ups and downs, dating back to the province's first big oil rush more than 100 years ago near Turner Valley. But who would have thought oil would one day be worth less than $0?
On Monday, the price for West Texas Intermediate (WTI), the North American benchmark, fell more than $50 to close at negative $37.63 US.
"It's certainly not something I ever thought I would witness," said Matt Murphy, a Calgary-based equity research analyst with Tudor, Pickering, Holt & Co.
"I won't wager a guess how it may trade [Tuesday]. Could it go worse than negative $40? I don't know," he said.
Oil companies in Western Canada and offshore Newfoundland were already drastically reducing costs, slashing payroll and pulling back on oil production in recent weeks with commodity prices hitting multi-year lows. Now, the cuts are being accelerated further with Husky Energy and Crescent Point Energy both on Monday cutting spending more than previously announced.
It was a crazy day on the markets.
WTI prices swung wildly as oil traders began to panic as time runs out to get rid of oil contracts for May. The price of oil is determined by investments known as futures contracts, which are agreements to buy and sell a certain amount of oil at a certain time in the future. Typically, the contracts are bought and sold countless times before the oil is actually delivered to the final buyer.
But the May contracts are set to finalize on Tuesday, meaning anyone left holding one will have to physically receive the oil — and storage options are filling up, especially in the U.S. Midwest. No one wants to be stuck with the oil and traders were willing to take heavy losses to ditch the contracts before they come due.
"Crude is purchased in advance and the current collapse for May is signalling no demand for a lot of barrels," said Bernadette Johnson, with Enverus, a Texas-based analytics firm.
It's like drinking from a fire hose. You get up in the morning and you really don't know what's going to hit you.- Brian Schmidt, Tamarack Valley Energy
"To make matters worse, if that's possible, the May WTI contract expires [Tuesday] and, like last month when the prompt month expired, we anticipate another price collapse," she said.
The contracts for several other grades of crude in North America are also near zero or in the negative, including Western Canada Select, a blend produced from the Alberta oilsands.
The June contracts for WTI are similar to global oil prices and hover around $20 US per barrel.
Still, for now, oil in negative territory? It's exceptional.
Alberta was already projecting a deficit of $6.8 billion this year and that was based on WTI at $58 per barrel. When the budget was approved last month, the oil price forecast already looked antiquated. Now, it's just ludicrous.
"It's like drinking from a fire hose. You get up in the morning and you really don't know what's going to hit you," said Brian Schmidt, the chief executive of Calgary-based Tamarack Valley Energy.
"We're talking to our crude marketing people and they've never seen it before and their computers aren't set to handle it," he said.
Natural gas prices in Western Canada turned negative a few times during the summer of 2017, however those price crashes were the result of pipeline maintenance issues, which cut off some storage options and caused supply to back up. That was a temporary regional problem, unlike the woes facing the oil markets today.
WATCH | Brian Schmidt on the stress the oil price crash is having on workers, families:
Optimism hard to find
There seems to be no easy solution to the crisis in the oilpatch as not even historical oil production cuts from the OPEC cartel — along with many other countries and companies — are enough to lift prices. There is still too much oil coming out of the ground and not nearly enough places to put it or use it.
Demand for fuels has plummeted as the aviation sector is hit hard by the pandemic and as most people stay home and park their vehicles.
Refineries are slowing down operations and don't need nearly as much oil.
Storage levels are filling up quickly and there are concerns about when there won't be anymore space left in tanks to hold more oil.
"I think you're going to see these kinds of aberrations as the stockpiles continue to build up and we start running out of space. So I don't think this is going to be anything unusual here for the next few months going forward," said Schmidt.
Tamarack Valley Energy produces about 22,000 barrels of oil per day and has pre-sold about 60 per cent of it at $50 US on average, said Schmidt, while the remaining production is likely fetching about $10 to $12 a barrel.
The only response the industry has to low prices is cutting costs, said Schmidt and he finds it sad to think of all the people that rely on the sector including small businesses, contractors, and landowners, among others.
"Unfortunately, as a leader in the industry, you're having to face people everyday and tell them they don't have a contract, don't have work, we have to wait and see what happens and try and make room," he said.
With files from Pete Evans