The magnitude of how damaged the energy industry is came into full view on April 20 when the benchmark price of U.S. oil futures CLc1, which had never dropped below $10 a barrel in its nearly 40-year history, plunged to a previously unthinkable minus $38 a barrel.
In just a few months, the coronavirus pandemic has destroyed so much fuel demand as billions of people curtail travel that it has done what financial crashes, recessions and wars had failed to ever do - leave the United States with so much oil there was nowhere to put it.
While the unusual circumstance of negative oil prices may not be repeated, many in the industry say it is a harbinger for more bleak days ahead, and that years of overinvestment will not correct in a period of weeks or even months.
“What happened in the futures contract the other day indicated things are starting to get bad earlier than expected,” said Frederick Lawrence, vice president of economics and international affairs at the Independent Petroleum Association of America.
The market is forcing the hands of all producers. Across the world, governments and companies are preparing to shut down output, and many have already begun.
The Organization of the Petroleum Exporting Countries and its allies had already committed to record cuts of 10 million barrels of daily supply that have yet to take full effect. That commitment was not enough to prevent oil’s fall below zero.
Saudi Arabia has said it and other OPEC members are prepared to take further measures, but made no new commitments. It is a measure of the depth of demand destruction that even if OPEC stopped producing altogether, supply may still exceed demand.
More than 600,000 barrels per day in production cuts have already been announced in the United States, along with another 300,000 bpd of shut-ins in Canada. Brazil’s state-run Petrobras (PETR4.SA) has reduced output by 200,000 bpd.
Azerbaijan, part of the group of nations known as OPEC+, is forcing a BP-led group to cut output for the first time ever. Oil majors in those countries have generally been excluded from government-imposed cuts.
“We have never done it before since they came to the country in 1994 and signed the contract of the century,” a senior Azeri official told Reuters.
That accommodation can no longer be made with the world running out of space to put oil. As of Thursday, energy researcher Kpler said onshore storage worldwide is now roughly 85% full.
Demand is expected to fall by 29 million bpd in April, the International Energy Agency estimated. Paris-based IEA expects consumption to pick up in May, but researchers cautioned that its expectation of a mere 12 million bpd fall in year-over-year demand may be too optimistic.