Wars have been fought over oil, but for a few hours Monday afternoon, West Texas Intermediate crude was one of the most unwanted commodities on earth. Prices for May delivery of a barrel of “Texas Tea” went negative—to minus $38. In other words, oil cost less than dirt, less than a ray of sunshine, less than a puff of wind.
If you wanted to sell your oil for delivery next month at the hub in Cushing, Oklahoma—a key pipeline intersection where prices are set for U.S. crude—you would have had to pay someone nearly $40 a barrel to haul it off. Most investors who trade oil futures don’t actually want to own oil in any physical form. They sell the contracts before they come due. But on Monday, few were buying because there are few places left to store the oil. There is simply too much crude and too little room for it in tanks on land, tanker ships at sea, pipelines, and salt domes. And once investors realized they might get stuck holding oil nobody wanted, it touched off a panic.
“Everybody’s trying to get out the door at the same time,” said Craig Pirrong, a University of Houston finance professor and an expert in commodities trading.
The negative pricing on Monday lasted for only a few hours, but oil had never before traded for less than zero, and the psychological impact of what happened Monday continues to cast a pall over the market. By Thursday morning, the June contract for WTI was selling for about $18 a barrel. It started the year above $60.
Oil watchers tried to take some comfort in the fact that the farther into the future you look, the higher the price investors are willing to pay for oil, a situation known in the industry as contango.
But Monday’s bout of “negative oil” is another reminder that Texas’s most important industry is in deep trouble. The country’s social restrictions in response to the coronavirus pandemic have gutted oil demand, which some forecasters predict may decline globally by as much as 29 million barrels a day by the end of this month, to fewer than 71 million barrels. In the U.S., producers are pumping 2 million barrels more each day than our refineries are processing. (U.S. refiners don’t all process oil from U.S. fields, but foreign refiners aren’t buying our oil these days, either.) There may never have been a time that so much oil was backing up against so little demand.
Producers, who failed to anticipate how quickly storage would fill up this month, are now scrambling to turn off the taps—at least those who can. Some companies need to keep trying to sell oil regardless of the price to meet the terms of debt agreements or to pay lenders.
And while gasoline is selling at the pump for prices not seen since the days when Internet Explorer was our favorite way to surf the web, no one cares. Typically, low gas prices stimulate the economy, but stay-at-home orders have kept most cars in the garage.
In response, oil companies have been announcing job and pay cuts for weeks, slashing budgets and cutting dividends. And now the bust is starting to hit their balance sheets. On Monday, Halliburton reported a $1 billion loss for the first three months of the year. It earned $152 million during the same period last year. Fellow service company Schlumberger booked a $7.4 billion loss for the quarter, largely because of a charge related to the declining value of assets. At Baker Hughes, the third major service company, the loss was about $10.2 billion. Service companies are the first to report earnings, and their results set the tone for producers and the rest of the industry.
It didn’t help that heading into the pandemic, OPEC and Russia got into a price war and flooded the market with cheap oil. They recently reached an agreement to cut production by 9.7 million barrels, or about 10 percent of global output, beginning next week, but it won’t be enough to offset the glut.
“It will keep it from being utterly catastrophic, but it’s small relative to the decline in demand that we have seen,” Pirrong said. “It will put a floor on prices, but it’s going to be at the basement level.”
The Texas Railroad Commission, which regulates an oil industry that normally bristles at talk of centralized planning, is considering whether to step in with powers it hasn’t exercised in nearly fifty years and limit production in the state. At a Tuesday hearing, Commissioner Ryan Sitton urged his counterparts to vote on a plan that would curtail production by 20 percent until the market rebounds.
“We are seeing a level of demand destruction and oil industry downturn that in the past occurred over a period of years now happening over a period of days,” he said. Sitton noted that tens of thousands—and perhaps hundreds of thousands—of jobs could be at stake, and so, eventually, could America’s hard-won energy independence that has come with the fracking boom. Failing to act could mean that when the industry rebounds, America again lapses into dependence on foreign suppliers who can pump oil at lower cost than Texans can, with more jobs going overseas rather than staying in the Lone Star State. “Eventually, those jobs will come back, but they may not come back in the state of Texas and the United States,” Sitton said. “I believe we have to step up and do things to protect that energy independence.”
The industry has been divided on what the commission should do. The commission took up the issue earlier this month after Pioneer Natural Resources and Parsley Energy, two major producers in the Permian Basin, urged it to intervene in the markets, as did major Republican influencer Tim Dunn’s CrownQuest Operating LLC. But commissioners Christi Craddick and Wayne Christian said Tuesday they wanted the attorney general to clarify their legal authority to act before considering such a move.
The Texas Oil & Gas Association, an industry trade group, has opposed any action, saying producers are curtailing production on their own. The group urged commissioners to “focus on recovery, not on creating a cartel.”
Even if it moved forward with Sitton’s plan, however, restrictions on oil production in Texas may not be enough to save many of the state’s oil producers. The market is simply too big, and the decline in demand too great. At 5 million barrels a day, Texas’s production accounts for just 6 percent of global output.
“It wouldn’t be a silver bullet,” Pirrong said. “The fundamental problem is the demand collapse that we’ve seen, and individual jurisdictions, even as big as Texas, are not going to be able to do things that are going to have a huge impact on that situation.”
Even as some parts of the U.S. and the world start to ease stay-at-home restrictions, it could take months—or longer—for oil markets to recover. After all, recovery from the eighties bust took the industry about fifteen years. Until travel and commerce fully resume, the industry won’t be out of the woods. And no one knows when that will be, because many people may be reluctant to leave their homes until the virus is contained.
For now, the markets are expecting a quick return to normal. Oil for November delivery is selling for about $29 a barrel. That’s still significantly less than it was selling for last November, and most U.S. producers need prices of between $48 and $54 to break even, according to the Federal Reserve Bank of Dallas. Oil at $29 is certainly better than at negative $38, but it’s not a positive for the industry.