What was behind oil's wild week, and the challenges that lie ahead
RBC Capital Markets' Helima Croft on what it will take to get to the other side of an 'unprecedented' crisis
It was a week unlike any oil markets have seen before.
On a day some oil investors are now calling Black Monday, the benchmark price for North American crude — West Texas Intermediate — went negative for the first time as oil traders panicked over a lack of storage and the expiring May futures contract, which are agreements to buy and sell a certain amount of oil at a certain time in the future.
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A few days later, crude prices for June look robust by comparison, climbing to nearly $17 US a barrel on Friday. But such prices are still punishingly low for an industry that started the year with WTI hovering above $55 US.
Oilpatch spending, production and jobs are all under increasing pressure as the economic fallout of the COVID-19 pandemic crushes demand for oil worldwide.
As the week came to a close, CBC Radio's The Cost of Living spoke with sought-after market watcher Helima Croft, a managing director and the global head of commodity strategy at RBC Capital Markets.
Croft, an expert on geopolitics and energy, addressed the week that was, OPEC's historic cuts, the challenges that still lie ahead and what it's going to take to turn things around.
The interview has been edited and condensed for length and clarity.
What was happening in the world that oil prices could go negative on Monday?
"The backdrop to what they're now calling Black Monday in the oil market is that since the COVID-19 crisis began, we've seen a situation where, around the world, people are locked in their homes. They are not flying, they're not driving cars. And we have no place, and no demand, for oil at the moment.
"That was a sort of backdrop that went into the week, heightened concern that we were running out of storage, particularly in the United States.
"And so there's a uniqueness to what happened on Monday in terms of the May contract for WTI crude that was essentially expiring. And you had a situation where there's a lot of pressure to sell that contract because nobody wanted to take physical delivery for that oil.
"But it reflected the larger concern in the market right now that we are running out of storage for oil."
There was hope, though, that when OPEC Plus announced a historically large cut — 9.7 million barrels-per-day of oil production — that it would help the situation. Has it helped?
"This is a really important supply cut agreement. However, it came, people would say, too late into the crisis. And what had happened in the month leading up to the agreement was a price war between Saudi Arabia and Russia.
"It is going to be an agreement that extends a multi-year agreement and so the hope really is that as demand begins to pick up and people start driving and flying again, that this agreement will help balance the market, hopefully in the back half of the year or into 2021.
"It's not going to impact the market immediately. It doesn't actually take effect till May 1. But it's important."
Are there any more tools that OPEC could use to address the current imbalance in oil markets?
"One proposal that was floated by the minister from Algeria, who has the rotating presidency this year, was to essentially make the 9.7-million-barrel-a-day cut effective immediately, so not wait till May 1. But there's some contractual issues with that ... so that does not look like it's going to be the policy route that OPEC opts for.
"Now, there's a question about compliance. OPEC has had a lot of challenges with compliance traditionally. Saudi Arabia, the UAE, Kuwait, those are the countries that have been the most compliant, honouring commitments. You have countries like Nigeria, Iraq — they have traditionally not fully lived up to their production obligations. And probably the biggest country that everybody is concerned about, will they live up to their cut commitments, is Russia.
"What OPEC and OPEC Plus can do is they can provide greater certainty to the market that these cuts will actually happen.
"The third thing that OPEC could potentially do, OPEC Plus, is to deepen the cuts. Saudi Arabia has agreed to cut production by close to four million barrels a day. The question is, would they go deeper?
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"But given the demand situation that we're looking at, given the hit that we're taking in terms of people who are not driving, people not flying, there's limited ability for OPEC to change the course of the prices in the near term."
Thinking about the crude storage situation right now, from your perspective, could we actually run run out of room for all the oil?
"We're looking at a situation where Cushing [in Oklahoma], one of the most important storage facilities in the U.S., could be hitting tank tops within the middle of May. There are other places to store in the United States, like, for example, Louisiana.
"But we could really be seeing a situation where, you know, come June, we could have very little storage left. And I think that speaks to sort of how unprecedented this crisis has been because what has made this period really unique is not just the scale of the demand hit we've taken because of COVID-19, but also we had a supply crisis in the midst of a demand crisis."
How does oil eventually recover from all this?
"I think we really need to get on the other side of the COVID-19 crisis. People keep saying to me when it all come back and I say, 'I'm not an epidemiologist.' It goes back when people feel comfortable getting in their cars, driving to work, drive to recreational activities, getting on planes again and flying.
"It's when do we get on the other side of this crisis ... [and] resume economic activity. That's what it's going to take. And particularly on the driving side. We've had such a hit to gasoline demand. It's really when people are willing to drive again."
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