Negative Oil Prices in North America
April 21, 2020
Focus Area—Canadian Economics
The Conference Board of Canada’s Senior Economist, Sam Goucher offers insights on today’s oil price contracts:
“West Texas Intermediate (WTI) sold for as low as negative US$40.32 per barrel on April 20th as the contract period for May deliveries neared expiration and oil traders were forced to unload contracts for barrels they did not want to take possession of. The rampant selloff of May contracts signals that inventories are filling quickly—a factor that will keep oil prices low even when demand begins to accelerate. The June differential between WTI and Canadian heavy crude narrowed from US$14 to US$11 per barrel, an improvement to prior weeks, as Canadian producers have started to significantly scale back their output with demand in freefall. With storage capacity becoming more limited and demand expected to remain suppressed over the coming weeks, the price for June contracts has also started to slide, dipping below US$15 per barrel this morning. ”
- West Texas Intermediate went for a record-setting negative US$40.32 per barrel for May deliveries on April 20th as traders rushed to offload contracts for barrels they did not actually want to receive.
- With a large portion of North America on lockdown and airline companies suspending flights, refineries have significantly cut back the production of gasoline and jet fuel, and thus demand for crude oil.
- The damage brought on by yesterday’s selling frenzy will be somewhat limited, given the fact that most of the oil being traded on the market today is under contract for June and July. Oil traders that made speculative purchases for contracts in May were left panicked as experts warned that U.S. inventories could be completely full by the end of May, as oil producers defer costly shut ins in the face of declining refinery demand.
- The OPEC+ group, which includes core members and additional oil-exporting countries such as Russia, agreed to cut a record 9.7 million barrels per day (b/d) of oil production for the months of May and June. While this represents a historic effort to bring balance to an oversupplied market, world demand for oil is estimated to have fallen by up to 30 million b/d.
- Production cuts in Western Canada have hitherto lagged the drop in refinery demand in the United States, where over 95 per cent of Canada’s oil and gas exports are destined for each year. This is in large part due to the nature of mining operations on Alberta’s oil patch.
- Oil sands producers in Alberta can’t easily turn on and off production, leaving them at a big disadvantage during oil price crashes. Surface mines incur large fixed costs in order to get them up and running and require constant production to remain profitable. Furthermore, shutting them down and booting them back up is a lengthy and costly endeavor. In situ mines require a constant flow of pressurized steam once they have been tapped; cutting off the flow of steam can result in permanent damage to the reservoir and restarting production can be cumbersome and costly.
- Canadian oil companies have cut capital budgets by over $8 billion since the beginning of March and are shutting in oil production—even at costly oil sands mines—to weather the storm. Our latest forecast shows Alberta’s mineral fuels mining industry will contract by 5.3 per cent this year. The combination of declining investment and shut in production will result in Alberta’s worst recession on record.