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Too Much Oil: How a Barrel Came to Be Worth Less Than Nothing

Something bizarre happened in the oil markets on Monday: Prices fell so much that some traders paid buyers to take oil off their hands.

The price of the main U.S. oil benchmark fell more than $50 a barrel to end the day about $30 below zero, the first time oil prices have ever turned negative. Such an eye-popping slide is the result of a quirk in the oil market, but it underscores the industry’s disarray as the coronavirus pandemic decimates the world economy.

Demand for oil is collapsing, and despite a deal by Saudi Arabia, Russia and other nations to cut production, the world is running out of places to put all the oil the industry keeps pumping out — about 100 million barrels a day. At the start of the year, oil sold for over $60 a barrel but by Friday it hit about $20.

Prices went negative — meaning that anyone trying to sell a barrel would have to pay a buyer $30 — in part because of the way oil is traded. Futures contracts that require buyers to take possession of oil in May are expiring on Tuesday, and nobody wanted the oil because there was no place to store it. Contracts for June delivery were still trading for about $22 a barrel, down 16 percent for the day.

“If you are a producer, your market has disappeared and if you don’t have access to storage you are out of luck,” said Aaron Brady, vice president for energy oil market services at IHS Markit, a research and consulting firm. “The system is seizing up.”

Refineries are unwilling to turn oil into gasoline, diesel and other products because so few people are commuting or taking airplane flights, and international trade has slowed sharply. Oil is already being stored on barges and in any nook and cranny companies can find. One of the better parts of the oil business these days is owning storage tankers.

“Traders have sent prices up and down on speculation, hopes, tweets and wishful thinking,” said Louise Dickson, an oil markets analyst at Rystad Energy, a research and consulting firm. “But now reality is sinking in.”

The world has an estimated storage capacity for 6.8 billion barrels, and nearly 60 percent is filled, according to energy experts.

Some of the oil glut is evident in Cushing, Okla., a critical storage hub where the oil that trades on the U.S. futures market is delivered. With a capacity to hold 80 million barrels of oil, Cushing has only 21 million barrels of free storage left, according to Rystad Energy, or less than two days of American production. As recently as February, Cushing was not even up to 50 percent. Now, experts say it will be filled to the brim in May.

Storage is almost completely filled in the Caribbean and South Africa, and Angola, Brazil and Nigeria may run out of warehousing capacity within days.

In his news briefing on Monday, President Trump said the government was “looking to put as much as 75 million barrels” into the Strategic Petroleum Reserve, which is used as a buffer during crises and was created after the 1973-1974 oil embargo.

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Credit…David Mcnew/Agence France-Presse — Getty Images

The reserve has about 635 million barrels of oil, and is equipped to store 75 million barrels more. But the reserve can take only about 500,000 barrels a day.

Congressional Democrats recently balked when the administration proposed spending $3 billion to fill the reserve as part of the stimulus package lawmakers passed last month. But on Monday Representative Lizzie Fletcher, a Houston Democrat, said she would introduce legislation appropriating funds for a reserve purchase.

But it will be hard to quickly fix the oil industry’s problems. The oil infrastructure is complicated and it’s not easy to turn off the taps. In addition, countries like Saudi Arabia and Russia, whose economies are reliant on oil, only reluctantly cut production.

Shutting down oil wells and then restarting them when demand returns can require expensive manpower and equipment. Fields do not always recover their former production. In addition, some oil companies keep pumping, even if they are losing money, in order to pay interest on their debts and stay alive.

The huge drop in prices on Monday was exaggerated by the way oil prices are set.

When traders sell oil they guarantee delivery at a future time. Normally the price differences between oil for next month and the following one are relatively minor. But on Monday oil to be delivered next month, or May, was essentially deemed worthless. Oil set for delivery in June also fell but not nearly as much — more reflective of the market’s view on the current value of crude.

Brent crude, the oil price benchmark outside the United States used by much of the world, whose May contract has already expired, fell about 5 percent to a little under $27 a barrel.

The disparities showed a market “undergoing extreme stress,” said Antoine Halff, a founding partner of Kayrros, a research firm. “It’s a sign of the very real imbalance between supply and demand.”

A little over a week ago, there was some optimism in the oil industry. The Organization of the Petroleum Exporting Countries, Russia and other producers said they would cut 9.7 million barrels a day of production, or about 10 percent of global oil output, the largest cut ever. It was a grim acknowledgment that global demand had collapsed.

But that record cut will not be nearly enough. Analysts expect daily oil consumption to fall by as much as 29 million barrels in April, about three times the cuts pledged by OPEC and its allies, and May isn’t expected to be much different.

“It’s relatively impressive in terms of the overall number, but it’s not enough to tighten the market between now and the fourth quarter of 2020,” David Fyfe, chief economist at Argus Media, a commodities pricing firm, said about the cut by OPEC and its partners.

U.S. oil producers are also reducing production, but not rapidly enough. At the current pace, American production will decline to less than 11 million barrels a day by the end of the year, from 13.3 million barrels a day at the end of 2019.

Many companies are already reporting substantial losses, and experts said businesses across the oil patch will have to seek bankruptcy protection in the coming months.

Halliburton, the giant provider of equipment, workers and services to oil companies, on Monday reported a $1 billion loss in the first quarter, in contrast to net income of $152 million in the same period a year earlier.

Gary Ross, chief executive of Black Gold investors, an oil trading firm, said demand was falling so fast that U.S. companies that recently were exporting oil are now cutting production.

“It doesn’t matter whether it is $15, $10 or $8, you are still going to” stop production, Mr. Ross said. ConocoPhillips, one of the largest U.S. oil companies, said last Thursday that it would temporarily curtail about 225,000 barrels a day of production.

Such cuts should help stabilize the markets, but it might take months. The U.S. contract for oil delivered in May 2021 was trading on Monday at about $35 a barrel, hinting at how long it might take for prices to reach levels they were at just a few weeks ago.

The oil industry’s plight is forcing policymakers to consider intervening more forcefully.

And on Tuesday, the Texas Railroad Commission, which regulates oil and gas drilling, will take up a proposal for a 20 percent statewide production cut on Tuesday. The commission used to regularly manage oil production but hasn’t done so since the early 1970s.

Exxon Mobil and other large companies have opposed mandated cuts but some smaller companies want the commission to act.

Scott Sheffield, chief executive of Pioneer Natural Resources, told the commission at a hearing last week that if the oil price stayed around $20 a barrel for a while, 80 percent of the hundreds of independent oil companies in the state would be forced into bankruptcy and 250,000 workers would lose their jobs.

At $30 a barrel, many companies would be “crippled,” Mr. Sheffield said. “But at least the industry will survive.”

Katie Rogers contributed reporting.

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Oil Prices Jump, and Stocks Slide, After U.S. Kills Iranian General

Oil prices jumped about 4 percent Friday, and Wall Street opened about 1 percent lower, on news that a powerful Iranian military leader had been killed in a strike authorized by the United States, ratcheting up geopolitical tensions in a region that supplies around 25 percent of the world’s oil and threatening to disrupt global supply.

The price of Brent oil, the international benchmark, surged to nearly $70 a barrel after the Pentagon said President Trump had authorized the airstrike against Maj. Gen. Qassim Suleimani at Baghdad’s airport. West Texas Intermediate, the American oil benchmark, also rose more than 2 percent, to $62.51 a barrel.

On Wall Street the S&P 500 opened about 1 percent lower, following global markets, but recovered much of that ground later in the morning. Hong Kong’s Hang Seng lost 0.3 percent, and Germany’s DAX index was trading 1.7 percent lower.

Analysts warned that Iran would interpret the strike as an act of war. Iran’s supreme leader, Ayatollah Ali Khamenei, pledged “harsh retaliation,” according to Iran’s state news media. These developments raised the prospect of volatility in Iran and Iraq, two major oil producers.

Around noon in New York, Brent crude oil was trading at about $68 a barrel.

The immediate price jump was among the largest since an attack on a critical Saudi oil installation in September temporarily knocked out 5 percent of the world’s oil supply. While Friday’s strike did not target any oil production, it raised fears of a protracted conflict in the region that could involve strategic attacks on oil fields.

In other markets, investments that are considered havens safe from market turmoil, such as gold and currencies like Japan’s yen, strengthened on the news.

The coming days could bring further pressure on assets that investors consider riskier, like stocks. It could also threaten a rally that began just a day ago in global markets.

The killing of the Iranian Revolutionary Guards commander inevitably raises fears about further instability in a region critical to the world’s oil supply. While sanctions imposed by the United States have cut Iranian oil exports to a trickle, other critical oil producers, including Saudi Arabia, Kuwait, Iraq and the United Arab Emirates, are clustered around the Persian Gulf.

It remains to be seen how Iran will respond to the loss of a top leader, but there is widespread concern that whatever action Tehran takes might affect these crucial oil supplies and push prices higher.

“Iran’s ability to impact the U.S. will probably be mostly within the Middle East theater,” said Neil Beveridge, a senior analyst at Bernstein, a market research firm. “Iraq and Saudi Arabia are obvious targets.”

Tankers carrying most of the oil leaving the Persian Gulf region — about 18 million barrels a day — as well as giant vessels loaded with liquefied natural gas, must pass through the Strait of Hormuz, a narrow channel that separates the United Arab Emirates, Oman and Iran and leads to the Indian Ocean.

The strait is 21 miles wide at its narrowest point, and the width of the shipping lane in either direction is just two miles wide, according to United States Energy Information Administration.

Iran’s coastline covers much of the east side of the Gulf, leaving Tehran well-placed to harass shipping with small boats, missiles, mines and other weapons. Last year, Iran seized a number of tankers in the area in an apparent effort to show that if Tehran were not permitted to export its oil, then supplies from other producers in the area were at risk.

Market participants worry that Iran could step up such attacks on shipping, although such a move would be likely to bring a quick response from United States military forces in the area.

Iran has other options for retaliating against Washington and its allies. It was clear in September that key Saudi oil installations could be knocked out with missile and drone attacks. Analysts worry about a similar strike by Iran, or a larger version.

Analysts also say that the oil installations of Saudi Aramco and other producers around the Persian Gulf could prove vulnerable to cyberattacks that might severely disrupt their operations.

Having just raised more than $25 billion through Aramco’s initial public offering, the Saudis have an interest in easing tensions in the region, and have been trying to solve problems like a long-running dispute over oil with Kuwait. But they could still find their oil industry under attack, analysts say.

Analysts say that Iraq, which has become the second largest oil producer in OPEC after the Saudis, could be where conflict between the United States and Iran plays out.

“Iraq is potentially the geopolitical flash point for 2020,” said Amrita Sen, chief oil analyst at Energy Aspects, a market research firm. If Iraq does become the scene of escalating conflict between Tehran and Washington, “you can imagine, then, that the fields could be at risk,” she said, referring to the oil fields that supply around 5 percent of world oil supplies and leading to a much larger surge in prices.

American oil companies operating in Iraq, including Exxon Mobil, could also become targets in this proxy war, said Helima Croft, an analyst at RBC Capital Markets, an investment bank.

Exxon Mobil and Chevron, which has been exploring in the Kurdistan region in the north, said they are monitoring the situation. “Exxon Mobil has programs and measures in place to provide security to protect its people, operations and facilities,” said Julie King, a company spokeswoman in an email.

“With trade wars receding, the heightened tensions in the Middle East may be poised to make a more meaningful impact on the oil market in 2020,” Ms. Croft wrote in a note to clients on Thursday.

Even before Friday’s events oil prices were edging higher as the outlook for supplies tightened. An agreement in December between the Organization of the Petroleum Exporting Countries and Russia to cut output has given oil prices a lift.

Analysts at Kpler, a firm that tracks oil shipments, said in a note published Friday that Saudi Arabia “clearly attempted to send a message” by cutting December exports by nearly 800,000 barrels a day, to 6.3 million barrels a day, the largest monthly decrease in five years. Analysts said that some refiners have not been able to buy as much oil as they wanted.

The prospect that President Trump will sign a partial trade deal with China has also eased the concerns about weak oil demand that weighed on the oil market in 2019. China is the world’s largest oil importer.

“Nobody’s worried about China now this year,” said Mr. Beveridge of Bernstein, who said that markets may be shifting back to a focus on geopolitics.

Thanks to the shale oil boom the United States is now much less dependent on oil from the Persian Gulf than it once was.

The United States is now a net exporter, competing with the Saudis and other Persian Gulf producers for markets. Asian countries like China, Japan and India are now major destinations for oil from the Persian Gulf, and would be most directly threatened by any disruption.

Oil, though, is a globally traded commodity, and so American consumers would feel the impact of any outages in the Persian Gulf or elsewhere in the prices they pay at the pump.