The Week in Review: April 27, 2020
The Great Oil Price Collapse
On Monday, April 20, the U.S. benchmark price for oil, West Texas Intermediate crude oil,[5] finished the day at -$37.63 per barrel. Yes, that’s a negative sign in front of the price.
By week’s end, the price closed at $16.94. We can go back to 1870 and not find oil priced below $0.00 (Deutsche Bank, Global Data).
How can a commodity price less than zero? Fears that oil storage facilities will soon fill up forced holders that would receive physical delivery of oil in May to PAY someone to take the oil off their hands.
Broadly speaking, the collapse in oil prices is tied to the cratering demand for the once valuable commodity amid economic shutdowns around the globe. The decision by OPEC+ to cut production by about 10 million barrels per day (bpd) seems to be too little too late.
Pre-crisis, the International Energy Agency estimated world demand at about 100 million bpd. In the second quarter of 2020, the IEA believes demand for oil may fall to less than 80 million bpd. It’s below the estimate by the U.S. Energy Information Administration (EIA) of about 88 million bpd. However, some sources suggest demand will hover near 70 million bpd (Reuters).
Oil companies are still pumping, at least for now, supertankers filled with oil are stuck off the coast of California (Bloomberg News), and soon, there may be little room to store it.
Economic Boom or Bust
In past decades, falling gasoline prices were an enormous benefit to the U.S. economy. But over the last decade, the U.S. has emerged as a net oil exporter per EIA data.
The latest study by the American Petroleum Institute (conducted by PwC) sums it up this way. In 2015, the U.S. oil and natural gas industry directly created 2.8 million jobs. Indirect employment totaled 7.5 million. Add the two together and oil and gas accounted for about 5.6% of total U.S. employment. Income totaled $714 billion or 6.7% of U.S. income.
Not all these jobs are at risk. Still, a survey last month by the Kansas City Federal Reserve concluded that over 50% of U.S. energy firms could go bankrupt if oil hovers around $30/barrel over the next one to two years.
That said, an economic recovery and a phasing out of lockdown restrictions could get drivers back in their cars, aiding consumption without sending gasoline prices too high. A cost of a fill-up might still be reasonable without the damaging impact of today’s rock-bottom prices.
If you have any questions or concerns, feel free to reach out to me, Tyler, or Will.
Two for the Road
The Strategic Petroleum Reserve has 77 million barrels of free capacity, a little less than the country uses in four days. It currently holds about 635 million barrels of oil in caverns on the Texas and Louisiana coasts. —CNBC, April 1, 2020
An Australian study that followed the eating habits of 12,000 people found that those who added eight portions of fruit and vegetables a day experienced an increase in overall mood, health, and life satisfaction—the equivalent of moving from being unemployed to being employed. —The University of Warwick
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