As We Walk Through Unprecedented Time, WTI Crude Futures Hit Negative Territory

Unthinkable as it may seem, even in our wildest of dreams, traders of WTI crude (West Texas Intermediate) oil are actually offering to pay buyers to lift crude from producers. Unprecedented, never before witnessed, not even in the darkest days of the world war two, but it is true, as we live and walk through the fallout of the coronavirus pandemic. The Tuesday expiry futures contracts of West Texas crude sunk into negative territory and at once was trading on Monday at negative $37.63 per barrel. With the global oil demand shrinking by a third, storage capacities across the world are filled, and refiners are refusing to take further deliveries. However, the phenomenon is only restricted to WTI crude and Brent crude the other major international benchmark for crude oil is priced close to $21 per barrel.

It seems President Trump’s oil diplomacy that forced Saudi Arabia and Russia to come back to the negotiating table is making a home run. These rock bottom prices in the country are a testimony to just how flooded the country is with this commodity, and how dearly it has cost the country not to have taken timely steps to curtail production so that this situation could be avoided. Perhaps the OPEC member countries and its associates have been saved by their timely action to cut production. Cushing Oklahoma which is a major storage facility of WTI crude in the United States and the delivery point of WTI contracts is filled to almost 55-million-barrel capacity since the end of February, with the facility have a total working capacity of 76 million barrels.

The United States of America though not a member of the OPEC despite being one of the largest producers of crude in the world, has a deep interest in how the international prices of the crude move. It is deeply interested in getting a remunerative price for the oil it produces, as it keeps several of the oil sand companies in the country in the green and its workmen employed. The country has never sought to be a member of OPEC or any other such organisation which seek to regulate the international selling prices of crude. The country has been a willing beneficiary of the production cut measures initiated by OPEC to curb fall in international crude oil prices and is happy to sell an incremental amount of crude every year at a good price. The anti-trust laws in the country prohibit companies from forming a cartel to try and use measures like coordinated production cuts in order to influence prices. Last month when the spat broke out between Saudi Arabia and Russia at the OPEC+ meeting and the price war situation was initiated by Saudi Arabia, a massive portion of the United States oil sands industry came under threat, prompting President Trump to take immediate steps to arrest the global slide in prices. The president, while he was holding negotiations with both Russia and Saudi Arabia aimed at protecting the domestic industry it seems, was aware of only half the picture. The country it seems was quite oblivious of the domestic demand and supply situation while it had a keen eye on the international markets. The United States, which is one of the largest producer of crude as well as the consumer of crude, has also seen a massive drop in business activity levels since the novel coronavirus outbreak.

Last months failure of the first OPEC+ talks happened over the reason that Russia had refused to agree to a production cut arrangement, with the United States also coming on board. It had concerns that the American oil producers will take advantage of the strengthening oil prices aided by a production cut of OPEC+ countries and send more oil to the world markets with Russia and other countries taking a beating in revenues. True to the Russian sides’ apprehensions, the production flow on the American side continued unabated, but the consequence would be that drastic on the American side was not at all anticipated. The very businesses the United States of America wanted to protect are now in great danger of bankruptcy than they were ever before.

The country it seems should have done more to protect its oil companies, and the president should have stepped in to initiate a state-led coordinated production cut formula at least a fortnight ago, which could have bypassed its anti-trust laws. The United States is currently the most severely affected country in the world due to the pandemic, having nearly 800,000 infected patients and losing at least 42,500 of its citizens to the outbreak. The country’s economy has been counting losses in billions by the day, and the number of people reporting for unemployment benefits has reached record numbers. The International Monetary Fund had on the 14^th of this month issued a report stating that the world economy is going to shrink by 3 per cent due to the pandemic and the US economy would fall into a recession that will be a worse recession than the great depressions of the 1930’s. Should structural defects crop up in its oil and gas industry, it would mean several of its companies would go bankrupt and the sector itself into a deep recession. Such a scenario will not just be damaging for the oil & gas industry but also for the entire American economy which will get into a deep struggle when it enters into the recovery phase after the pandemic dust settles.

The situation with the American oil producers will continue to deteriorate as the pandemic continues to create havoc across the American continent. It is high time the American administration stand up and take a stance on an OPEC type production and price control mechanism. Though the Brent Crude is priced way above the WTI crude, the customers of Brent Crude are unlikely to come for WTI crude in the short run due to the lockdown conditions everywhere. It is thus imperative now that the producers in the United States have to cut down production, but not in a coordinated fashion, meaning that a significant number of them are at the risk of going bust.