The battle against coronavirus has slowed the global economy so much that key oil prices fell below zero.
Commodity traders reacted to a slew of bad news by further trashing oil prices on Monday, April 20 to unfathomable lows.
Like minus-$38 dollars a barrel (that’s MINUS 38) for West Texas crude oil. That’s for “futures” contracts, agreements to buy oil at a set date — in this case, Tuesday, April 21.
I rang up Dave Hackett of Stillwater Associates in Irvine, who’s been following fuel markets since 1978. Perhaps this veteran analyst of energy-price swings could help me explain what’s more than just one weird day of trading.
This must be fake news. Oil prices can’t be below zero?
Sorry. It’s real. In the trading world of commodities, strange things can happen.
Let’s say you agree to buy crude oil. Now, demand for fuel dropped dramatically because of the economic slowdown due to attempts to limit the pandemic. You have no good choices.
If you take the product, where would you put it? You can’t sell it. So traders were willing to pay someone to take the oil. That’s how you get negative prices.
“Speculators are getting savaged,” Hackett says.
What about energy prices for real people, not for traders?
If you’ve gotten out much lately, you’ve noticed that Southern California gasoline prices are cheap.
Local gasoline averaged $2.70 cents a gallon as of Monday, according to the U.S. Energy Information Administration. That’s down 71 cents in eight weeks and the lowest since August 2016.
Barring any massive change in crude oil markets, Hackett says it’s a good bet that Southern California drivers in six to eight weeks will be paying less than $2 a gallon for gasoline. Remember: there’s roughly $1 in taxes and fees built into every gallon of gas sold in the state.
Hackett notes in the interim, gas dealers may have a decent profit margin “but the business has no volume.”
This cannot be good for the energy business?
Nope. Look at Southern California’s missing traffic congestion.
For example, Orange County toll road traffic was off by two-thirds in the weeks after stay-at-home orders were issued. Less driving equals less fuel used equals less need for crude oil. And this is a global situation.
Making it worse is that two of the world’s major crude oil producers — Saudi Arabia and Russia – decided to engage in a price war. Even their attempts at a truce, promising to dramatically curtail the amount of crude oil produced, flopped spectacularly.
That signaled a world swimming in crude oil with almost no bottom to oil prices. Monday’s trading only proved that, to an extreme.
But I’m not in the energy business!
For those who are still driving a lot, certainly, this is a rare gift from coronavirus. For much of the economy – local, national and global – this is still bad news.
Start with any region heavily dependent on the energy industry. You can expect massive layoffs. Those who remain in the business will probably see dramatically lower incomes.
But even regions with lesser energy exposure will suffer certain losses. California refineries, for example, are running out of storage capacity for their gasoline output. That means we will see refineries shut and workers laid off.
Next, think of all those gas taxes and fees. Less gasoline consumption will lower what governments make from those levies. That cuts the cash for road improvements. That hurts drivers. That clobbers the road construction industry.
What’s the industry doing about this price collapse?
There will be more cost-cutting, production-curtailments and layoffs in an attempt to match output with demand.
But thriftiness can only get you so far. Bankruptcies and total closings of energy businesses will soon speed up.
Now, some industry players are making novel bets on fuel glut. Hackett talks of tankers sitting offshore filled with natural glass – “floating storage.” There are rail cars filled with ethanol – “rolling storage.”
That’s quite opposite of folks who paid others to take crude oil off their hands. Excess fuel stuffed into ships and rail cars is a gamble that the goods can eventually be sold … hopefully, at a profit.
Is this a “new normal” for fuel?
Hackett admits this is so unprecedented it’s hard to guess what the end result will be.
Questions range from “will people drive as much as they once did?” to “has gasoline gotten so cheap that alternate energy options, like electric cars, lose their popularity?”
Bottom line: The energy industry “won’t come back until all this inventory has worn off. That’s a year or two away,” Hackett says.