The Glut Drowning the Oil Market -- Update
May 07 2020 - 3:26PM
Dow Jones News
By Amrith Ramkumar, Tristan Wyatt and Collin Eaton
The world is running out of room for its oil.
Lockdown measures are crippling demand, and supply isn't falling
quickly enough to keep up. Oil-storage tanks around the world are
rapidly filling with crude, leaving the new production coming out
of the ground with nowhere to go.
The overwhelming glut is threatening one of the world's vital
industries and could prolong the economic fallout from the
coronavirus. As storage filled, one price for U.S. crude recently
fell below $0 a barrel -- a first in oil-market history --
effectively meaning sellers would have to pay buyers to take
barrels off their hands.
Even with a recent rebound as parts of the world reopen for
business, oil trades at a fraction of where it started the year.
U.S. crude futures closed down 1.8% at $23.55 a barrel Thursday,
extending a streak of wild moves by erasing an earlier 11% rally.
Most energy companies would lose money producing at these
levels.
Stockpile data are incomplete or delayed, but recent figures
already illustrate the crisis.
Global oil inventories fall into two main categories: commercial
stockpiles and strategic reserves held for emergencies. Most
investors focus on changes in commercial inventories because those
are most sensitive to shifts in global supply and demand.
Producers and traders who don't want to sell crude at today's
low prices can try to store it in hubs around the world, then sell
in the future. The problem now is that demand for storage space is
skyrocketing.
U.S. commercial stockpiles are rising at their quickest pace
ever in government data going back to 1982. At 532.2 million
barrels during the week ended May 1, inventories are soon expected
to blow past a record of 535.5 million barrels set in March
2017.
The increase has been pronounced in Cushing, Okla., a key hub.
Analysts said dwindling storage space in Cushing contributed to the
recent drop in one futures contract below $0 a barrel. On April 20,
that futures contract was close to its expiration date -- meaning
traders had to either sell it or accept delivery of actual barrels
of oil at Cushing by the following month.
Those stuck holding the contracts likely couldn't find available
storage for oil and began paying others to take the contracts from
them.
It is hard to know how much space is actually available.
Logistical hurdles mean storage tanks can't be filled to the brim,
and competition for remaining space is fierce. That means much of
the remaining empty room could have already been claimed for future
use. Even so, the official Energy Information Administration
figures show Cushing inventories rising at a pace that would have
them completely full in weeks.
As a result, crude-futures prices recently traded around their
lowest levels in two decades.
Normally, when oil prices slide, consumers travel more, limiting
the price drop and eventually spurring a rebound. But with much of
the world practicing social distancing, fuel consumption has
plummeted.
That means companies industrywide are struggling. Refiners such
as Marathon Petroleum Corp. and Valero Energy Corp. that take in
oil and turn it into petroleum products including gasoline are
bringing in much less crude. The extra crude must find a home in
storage.
In addition to Cushing, other U.S. storage hubs are located in
the Gulf Coast. A flood of oil from Saudi Arabia, the world's
largest exporter, is starting to arrive in the region -- fallout
from a March production feud between the kingdom and Russia that
raised global supplies even as demand crashed.
That extra crude could make the glut in the U.S. even worse. Oil
normally moves seamlessly through a network of pipelines and
storage hubs across the country, but more of it will have nowhere
to go.
The excess oil is forcing energy companies to curb spending and
shut in productive wells. Some companies are starting to go
bankrupt and lay off employees. The turmoil is erasing hundreds of
billions of dollars from the sector's market value.
There is also a large amount of oil floating at sea with nowhere
to go, according to cargo tracker Kpler. Some ships have even been
crowding off the California coast recently.
Oil-market analysts are also watching inventories overseas,
particularly in China, the world's largest commodity consumer.
Figures from analytics company Kayrros show a rise in those
stockpiles recently, too.
And with supply projected to continue exceeding demand for now,
many analysts expect prices to remain volatile.
--Emil Lendof and Sarah Toy contributed to this article.
Write to Amrith Ramkumar at amrith.ramkumar@wsj.com and Collin
Eaton at collin.eaton@wsj.com
(END) Dow Jones Newswires
May 07, 2020 15:11 ET (19:11 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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