Tracking the Collapse of the Oil Industry
First, I never thought that I would see this in my lifetime. But yesterday the price of oil for the upcoming May futures contract was minus $41/barrel. Yes, some large player (unidentified at the moment) was willing to pay -$41 to someone to take the oil off of their hands. On Friday, oil closed at $18/barrel. Yesterday, was a real negative. West Texas Crude ended yesterday at -$37.63/barrel, but oil futures for June contracts are currently in the higher $20 dollar range. Keep in mind, that it is traders who impact market prices. What is transpiring is not a supply problem. The world is swimming in petroleum. We are witnessing a serious lack of demand. U.S. oil production has fallen by 800,000 barrels/day, but it really needs to fall about another one million barrels/day to bring some needed supply relief.
This is not a new problem, but a highly exacerbated one that actually began in 2018. Two years ago, if you were plugged in to the oil markets, you knew that supply was steadily creeping by global demand. Now, because of COVID-19, we are witnessing a scenario never really seen in modern petroleum market history. Of course, this situation is attributable to the shutdown of world commerce, but the current situation has also been exacerbated by the recent Russian-Saudi oil dispute. Yes, both parties agreed to cut 10 million barrels/day but they need to cut in the area of 30 million barrels/day. Additionally, the U.S. and other countries have run out of storage space. Even more troublesome, is that our future contracts with the Saudis stipulate that we take nearly 40 million barrels of their oil over the next several months leading into and during the summer. Usually, petroleum and petro products experience their most robust use during the summer months. I fear not this summer.
The good news, if there is any really good news about the current nearly 300 percent plunge in oil prices, is that, if congress will consent, the federal government can buy this crude at bargain basement prices and significantly expand our petroleum reserve and save taxpayers some money. Of course, this market situation can have an impact on renewables. First, the cost of natural gas and oil are exceptionally low. Second, if these prices continue in such a low range or even 20 percent higher, renewable energy developers may think twice about beginning a project and projects in their construction phase may be halted. In fact, with COVID and the plunging demand for electricity, along with this unthinkable disruption in the oil markets, renewable energy will have a difficult time competing in the marketplace, even with current subsidies.
Certainly, the large integrated oil companies have plenty of cash on hand and will easily survive. Even well-established shale oil and gas businesses like Pioneer, EOG Resources, Whiting Petroleum, Chesapeake Energy, and ExxonMobil will live on to fight another day. The best path for the cash-poor companies, those living month to month on bank credit, is to declare bankruptcy, restructure and try to survive. Not only is the oil industry in a depression, but America is in a real depression.