The recent collapse of oil to below zero was not driven by fundamentals in the supply and demand of oil. Rather, it was a function of oil traders and speculators having to sell their way out of a badly timed trade. The speculators that own oil delivery contracts have no intent of taking delivery of the oil for which they own. They buy the contracts and then trade them before they have to take any physical delivery. Unfortunately, as the May 2020 contracts were expiring on April 20th, they could not find any buyers for their contracts. Since they are not in the business of taking physical delivery, and as all of the storage capacity in the United States is full, these traders were forced to get rid of the contracts at below zero. This has never happened before and it was definitely a major event. However, the negative oil price is not indicative of the current value of oil. Certainly oil prices are very depressed right, now at lows not seen in over 30 years, but it is not negative although single digit prices in the near term would not be out of the question.
Surprisingly, layered into the bad news is data that points to better dynamics for our industry in the mid to long-terms.
We have all heard of the growing movement to transition to cleaner sources of energy. This has been a tremendous driver of the recent development of clean and green energies. There is a growing concern among clean energy industry advocates that the collapse in oil prices and the resulting drop in consumer products such as gasoline will result in slower development. Furthermore, the oil and gas industry has also taken on a large burden of developing the technologies for future transitions. As a result, the reduction in oil companies’ financial resources will also create further slowdown in the development of clean energy technology.
Another ramification of the low oil price, while positive for our industry, is the destruction of the shale oil plays which are no longer economically viable. Today, many shale wells are being shut-in which is going to dramatically reduce total oil production. Additionally, even conventional oil wells are being closed due to the lack of demand for oil. The current oil produced is not being consumed and must be stored in pipelines, terminals or oil tankers. However, the world’s storage is short. Much of what I have been reading by analysts who are much more well informed, is that the these well shut-ins will cause significant if not permanent impairment in those wells to produce oil in the future.
What this means longer-term is that once this COVID-19 global shutdown is behind us and oil demand returns to normalized levels, there is likely going to be a supply crunch that will drive prices significantly higher quickly. I cannot predict when this will be but at some point in the not-too-distant future, I do believe we’ll get back to normal and our industry is going to rebound quickly.