 Why oil prices went negative and why they can go negative again SHARE     

MARK E TS

Why oil prices went negative and why

they can go negative again
PUBL I S H ED SUN, AP R 26 2020 • 5:44 P M E DT | UPDAT E D 8 MIN AG O

Brian Sullivan
@ S U L LYC N B C
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TRENDING NOW
KEY Oil storage around the world is filling up, fast. Onshore tanks in most parts of the
POINTS U.S. are at capacity, and the rest of the world isn’t far behind. Public companies took
far more small business
loans than first thought
If refineries ultimately don’t want oil, it has little to no value.  If you have oil and 1 — here’s the latest tally
nowhere to put it, it can have negative value.

Stocks making the

Absent a sharp demand return, production will need to be reduced more rapidly biggest moves
than what’s happening now. premarket: AutoNation,
2 Caterpillar, Boeing,
Beyond Meat & more

General Motors suspends

 Geology is the study of pressure and time. dividend, stock buybacks

to preserve cash
3
That’s all it takes really... pressure… and
time. 5 things to know before
the stock market opens
Monday
— Red Redding “ T H E S H AW S H A N K R E D E M P T I O N ”
4

Pressure. Time. And a big gosh darn supertanker. Coronavirus live updates:
Ex-FDA chief still sees
‘pervasive spread’ in US,
Apologies for altering one of Morgan Freeman’s most famous lines in movies, 5 VW restarts production
but it had to be done to fit the oil drama that’s playing out with a Hollywood
script.

The investing world was gobsmacked and eyes glued to CNBC when oil futures
went negative last week. If you missed it the first time, don’t worry it could
happen again.

Oil storage around the world is filling up, fast. Onshore tanks in most parts of
the U.S. are at capacity, and the rest of the world isn’t far behind. Desperate
traders and producers are using any resource to store their crude.

Oil-storage tanks are seen from above in Carson, California, April 25, 2020 after the price for crude plunged into negative territory for
the first time in history on April 20.
Robyn Beck | AFP | Getty Images

Oil supertankers are looking like petroleum paparazzi, crowding the Los
Angeles shoreline, either as floating storage or waiting on some kind of turn in
sentiment. With prices higher in coming months, for now it pays to sit on oil
and hope to sell it for more money down the pipeline.

Hope is a good thing.  Maybe the best of things.

The OPEC+ and G20 production cuts begin Friday, May 1st. But there’s
already an armada of oil tankers heading our way right now, ready to give us
40+ million more barrels of oil no one needs. Much of that will go to the Saudi
Aramco-owned Motiva refinery in Texas, but overall refinery output is already
down to 67% and may get cut further because no one is driving.

If refineries ultimately don’t want oil, it has little to no value. If you have oil
and nowhere to put it, it can have negative value.

The key question right now is how much time is left until everything is full:
every tank, every ship, every hole in the ground?

Depending on whom you ask, it’s anywhere from two weeks to maybe two
months, best case. Oil industry infrastructure is large and labyrinthine, and
full of smart, creative people who may be able to extend current capacity
through human ingenuity, thus postponing what no one previously could even
dream of: nowhere to go, and negative prices. The industry is under pressure
like never before.

 Pressure.  And time.

Absent a sharp demand return, production will need to be reduced more
rapidly than what’s happening now. Though only a few weeks into the first
round of capital spending cuts, U.S. producers may have to cut again, and
soon.

Even long time oil folks, cynical yet optimistic as they are, understand what to
do: Don’t take oil out of the ground if you have no place to put it and no one to
sell it to.

The industry is facing unprecedented demand, job and wealth destruction. Yet
some continue to pay for the same barrel of oil three times. They spend to take
it out of the ground, spend to move it somewhere else, and spend to store it
somewhere, perhaps even back in the ground.

It has to stop or the industry will.

And to anyone who can’t see that, Andy Dufresne would have a simple
question: how could you be so obtuse?

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