On Friday, Treasury Secretary Steven Mnuchin said the U.S government is considering taking equity stakes in U.S energy companies to help the oil and gas sector, which is currently in free fall. In March, the White House top economic advisor, Larry Kudlow also said that the government might consider taking equity stakes in energy companies.
This is all coming a week after the historic collapse in WTI, which crashed to negative $40/barrel as holders of the May WTI futures panicked to sell their holdings at any price – by paying buyers to receive deliverable oil barrels.
Goldman’s chief commodity strategist Jeffrey Currie reminds us that it is important to remember that unlike bonds and stocks, “commodities are spot assets, not anticipatory assets and must clear current supply and demand, which still remain extremely out of balance in all markets.”
So the question is, will we see negative crude prices again in the coming months?
Yes, we very well could as global storage capacity is going to be tested in the next 3-4 weeks.
Oil tankers carrying enough crude to satisfy 20% of the world’s daily consumption are currently gathered off California’s coast with nowhere to go as fuel demand has collapsed.
MUST WATCH 🎥
Oil tankers carrying enough crude to satisfy 20% of the world’s consumption are gathered off California’s coast with nowhere to go as fuel demand collapses.
Don’t think oil can go negative again? Maybe watch this video…
— Gold Telegraph ✪ (@GoldTelegraph_) April 25, 2020
The more than 20 million barrels of crude is the highest volume of oil to ever float off the West Coast at one time, according to Paris-based Kpler SAS, which tracks tanker traffic. About three-quarters of those tankers are holding oil in storage, meaning they have been floating steadily for seven days, also a record.
With all this supply, we could defiantly see another collapse in prices into negative territory as oil producers will be forced to pay buyers to take physical possession as global storage capacity is nearly tapped out.
One analyst warned that pain in the industry is far from over as Paul Sankey said we would potentially hit 100/bbl next month. He went on to say,
“We have clearly gone to full scale day-to-day market management crisis, and as we said when we first called for negative prices, the physical reality of oil is that it is difficult to handle, volatile, potentially polluting, and actually useless without a refinery.”
Even though the June delivery has rebounded, according to Sankey, the market will continue to get much worse over the next month:
“If you had a stinking barrel of oil in your backyard, would you pay someone $100/bbl to take it away? Yes, and you would probably be relieved you were not charged $300/bbl,” Sankey wrote.
He continued: “That is the situation we are in, of producers having nowhere to go with the inexorable production that takes weeks and months to reduce to zero. Of course, you now need someone to handle it for you. And they are sold out of capacity to do so.”
It’s clear, chaos in the oil industry is far from over.