In just a few months, as billions of people stopped traveling, the Corona Virus pandemic destroyed fuel demand in a way that failed the financial meltdowns, recessions and wars – as the United States had no oil to store.
While the unusual circumstances of negative oil prices may not be repeated, many in the industry say that they portend more difficult days and that years of excessive investment in oil will not be corrected within weeks or even months.
“What happened in the forward contract that day indicated that things started to get worse sooner than expected,” said Frederick Lawrence, vice president of economics and international affairs at the Independent American Petroleum Association.
He added, “The pipeline companies are sending notifications that they cannot take more crude oil. This means the well is closed, even retroactively.”
Evidence of value erosion of an indispensable global product since the late nineteenth century has been circulated around the world last week.
In Russia, which is one of the largest producers in the world, the sector is considering resorting to burning oil to block it from the market, sources told Reuters.
Equinor, the Norwegian oil giant, cut its quarterly dividends by two thirds. Next week, the results of the largest oil companies in the world will be published, including Exxon Mobil, BP and Royal Dutch Shell. All are expected to announce details of new spending cuts, and investors will closely monitor these companies ’dividend plans.
The US-owned Continental Resources, owned by US billionaire Harold Hamm, sent technical kits to fields in Oklahoma and North Dakota midweek to suddenly shut down Aabar, and the company announced it could not deliver crude shipments to customers due to the poor economic viability.
The Continental decision to declare a state of force majeure – usually confined to war conditions, accidents or natural disasters – shocked and drew sharp criticism from the main refining industry association. But some say that there is a rationale for this, even if it is not acceptable.
Anas Al-Hajji, a Dallas-based energy market expert, said, “Signing contracts is based on the normal conditions of society for the last 100 years. If a new grandfather is outside these normal conditions, it calls for a force majeure situation. This is what Harold Ham and others say – these are conditions that are not Normal”.
Even the long-rumored White House decision that Chevron could no longer operate in Venezuela, where it has been present for nearly 100 years, was met with indifference.
“The global climate is terrible … the license is no longer important,” said one person close to a Western oil company in Venezuela.
And the market imposes its word on all producers. Around the world, governments and companies are preparing to stop production, and many of them may have already started.
The Organization of Petroleum Exporting Countries and its allies have already committed to unprecedented cuts of ten million barrels of daily supplies, which have not yet been fully implemented. But this commitment was not enough to prevent oil from falling below zero.
Saudi Arabia has said that it and other OPEC members are ready to take further measures, but has not made any new commitments. An indication of how deeply the demand collapses is that even if OPEC stops production altogether, the supply may still exceed demand.
Production cuts in the United States of more than 600,000 bpd have already been announced, as well as 300,000 bpd due to closures in Canada.
The Brazilian National Oil Company, Petrobras, cut its production by 200,000 barrels per day.
Azerbaijan, part of the group known as OPEC +, is forcing an alliance led by BP to cut production for the first time ever.
In general, the major oil companies in these countries were previously excluded from government-imposed cuts.
“We have never done this before they came to the country in 1994 and signed the century,” a senior Azerbaijani official told Reuters.
It is no longer possible to adapt to the depletion of oil storage spaces in the world. Kepler Energy Data said that the capacity of land storage around the world amounted to about 85 percent Thursday.
The International Energy Agency estimates that demand is expected to drop by 29 million bpd in April and consumption to rise in May, but researchers have warned that it expects only a 12 million bpd drop in demand on an annual basis that could be overly optimistic.
“I am sure to hear the same numbers about the collapse of demand from 20 to 30 million barrels per day … and until we see an improvement in the situation, one has to ask,” said Jane McGillian, an analyst at Tradition Energy who was working at the New York Mercantile Exchange when launching US crude futures in 1983. What does the future hold? ”