After a tumultuous day that saw oil futures falling into negative territory, President Donald Trump suggested the U.S. could either purchase roughly 75 million barrels of oil to add to the country’s Strategic Petroleum Reserve, or rent that spare capacity to oil companies squeezed for storage space due to the glut in the market.
“This is a great time to buy oil. We’d get it for the right price,” Trump said at a coronavirus task force news briefing on Monday night. “Nobody’s ever heard of negative oil before.”
Lawmakers have discussed providing support to the struggling energy sector, but a plan for the Department of Energy to spend $3 billion purchasing oil for the Strategic Petroleum Reserve was suspended when the money was not included in the stimulus package passed earlier this month.
April 20, 202002:38
The price for West Texas Intermediate crude contracted for May delivery plunged Monday to negative $37.63 a barrel for contracts expiring Tuesday.
In an ordinary market, buyers with such a short horizon would typically be businesses such as airlines or refineries taking delivery of oil right away. But as the COVID-19 pandemic has ravaged economies around the world, would-be buyers literally have no place to warehouse oil, which is amassing in storage facilities, on board tankers and in pipelines around the world.
Although the coalition of oil-producing countries referred to colloquially as OPEC+ agreed to shave nearly 10 million barrels a day off their collective output, this cut pales in comparison to the speed with which our collective appetite for oil is evaporating.
In today’s moribund market, global demand for oil has plummeted by 25 to 30 million barrels a day, said Tom Kloza, global head of energy analysis for Oil Price Information Service, an IHS Markit company. “Right now we’re at peak demand destruction.”
Oil is piling up faster than refiners, airlines, shipping companies and drivers can use it, since no one in the world needs it immediately — an unlikely and unprecedented confluence of circumstances that has distorted the market to such extremes that a seller would, in theory, have to pay a buyer to take oil off their hands.
In reality, it doesn’t actually happen like this, said Stewart Glickman, energy equity analyst at CFRA Research.
“There’s a difference with what you’re seeing for the front-month contract and what it means in the real world,” he said.
“You have paper transactions for crude which are done by some ETFs,” he said. Contracts roll over from month to month, ordinarily without much fanfare, since prices don’t fluctuate substantially in the short term.
Glickman also suggested that the escalating nature of the day’s losses was due in part to algorithmic trading programs responding to earlier decreases, creating a negative feedback loop.