Below zero: what the WTI crash means for US and global markets

With analysis from Ed Crooks, Benjamin Shattuck, John Coleman and Hillary Stevenson.

NYMEX Light Sweet Crude (WTI) front month futures dipped to minus US$37.63/barrel on Monday, April 20, collapsing under the weight of global oversupply and sharply reduced demand due to the coronavirus pandemic.

We asked our experts on supply and demand dynamics, infrastructure, and financial markets to shed light on these historic numbers and discuss what we can expect in the near and longer term.

If you have 30 minutes to spare, listen to the webinar.

If you have just three minutes, scroll down to read the three things you need to know today about the WTI price collapse.

1. What do the effects of selling May contracts mean for June and July?

It’s possible that if current conditions continue, Cushing storage tanks could reach capacity by mid-May. This week’s contango structure is likely to persist into June and July, but could look different if the US can export more crude. The OPEC+ agreement to reduce supply, which takes effect in May, should alleviate some pressure over the coming months, but keeping up with rapidly declining demand means other countries, such as the US, will also need to shut in production.

June and July contracts look consistent with Brent prices in the US$20s, but a weak price environment, even in a functioning market, means reduced activity levels and shut-in production. While movement in the waterborne market could help, the capacity situation in Cushing will remain until crude consumption from activities such as driving and flying begin to return to normal.

2. What does it mean for the supply side?

Right now, the market is simply forcing the hand of the producers — they’re facing weighty decisions over shutting in production. The most recent shut-ins have been strategic, with operators focusing on the most expensive or low-producing wells, but these new market developments signal more austere operations.

Our real-time monitoring has already revealed Permian roll-offs, with as much as 400,000 barrels per day coming offline since March. Sustained low oil prices will curtail future activity and pull back onstream production. Minimum volume commitments and oilfield services contracts add complexity to the supply side, putting producers in the increasingly difficult position of attempting to move crude in a gridlocked infrastructure or paying tariffs to keep it in place.

The WTI-Brent spread has blown wide open this week, but it’s conceivable to see normalized differentials if the waterborne market allows US barrels to compete once the OPEC+ terms are underway. We’re monitoring inventories in Houston and Corpus Christi closely and in real-time for any impending movement.

3. What is the current outlook for US production in 2020?

With Cushing on course to be full in May, inventories are filling at record-high rates, taking on upwards of five million barrels per week in April. The key factor in reduced activity and production shut-in will be seeing sustained crude prices in the US$20s or below. In large part, the damage is done for 2020, and we believe this significant slowdown will lead to a decline of one million to two million fewer barrels per day from activity reduction. Production shut-ins will add to that number as storage capacity peaks.

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