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“CLOSEOUT SALE: Free Crude Oil Available for 24 Hours”
Could you ever imagine your local gas station posting that sign?
Yesterday, the price of West Texas Intermediate (WTI) Crude Oil plunged to $0. And then it kept falling.
WTI oil ended the trading day at negative $37.63.
That means oil producers in the U.S. are literally paying to have their oil production taken off their hands.
This is the latest fallout from the pandemic and the economic crisis.
Global production of crude oil typically is around 100 million barrels per day. That makes it the biggest commodity market in the world.
OPEC has responded to falling oil prices with plans for production cuts. The organization of oil producers plans to drop production by 9.7 million barrels per day. Yet that’s not nearly enough because . . .
April demand for oil will plunge by 29%, according to The International Energy Agency.
Demand has been falling since January – when China was under lockdown. The same thing has happened globally as other countries lockdown – and economies grind to a halt.
At the same time, oil production has remained largely unchanged. And that’s leading to a glut of crude oil around the world.
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There’s No Place to Store the Oil
Globally there’s enough storage space for 6.8 billion barrels of crude oil. Right now, it’s estimated to be at 60% of capacity.
Cushing, Oklahoma, is the site of the key oil storage complex in the U.S. It’s where oil on the U.S. futures market is delivered.
Cushing has capacity of 80 million barrels of oil. And it’s currently estimated to be 70% – 80% full. That means it’s not accepting new deliveries of oil.
This situation means U.S. oil producers are running out of places to send their crude oil.
The futures contract for May delivery of oil expires today. And that’s why we saw oil prices plunge in Monday’s trading session.
Right now, there’s a contango in the oil markets. That means the price for near-term delivery is lower than the price for oil in futures months such as June or July.
Oil Signals Deep Economic Recession
Economic measurements such as Gross Domestic Product (GPD) measure what has happened in the past.
It’s like the report card for the economy.
Yet crude oil prices measure what’s happening in the economy right now. And when we look at future prices it tells us where the economy is heading.
Let’s look out at the June 2020 crude contract. WTI is currently trading at under $15 per barrel – compared with $61 in January.
That’s a 75% drop in price for oil since January!
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U.S. energy companies are responding. In the last month, over 30% of oil rigs have gone offline.
The recent price action will force many more producers to shut off production this week and next.
America’s energy companies can’t survive oil prices at these levels. At $30 per barrel, things are bad. And $10 or $20 per barrel they can’t survive.
These companies loaded up on far too much debt during the oil boom. And now they’re loaded up with debt that they are unable to service.
This could spark hundreds of bankruptcies in the U.S. Plus, the shutdown of the energy industry will destroy millions of American jobs.
The shale boom created 1.7 million high-paying jobs in America. And many of those jobs will disappear with the coming bankruptcies.
Then collapse of oil prices is the latest signal of America’s huge economic challenges.
President Trump is pushing for an incredible $2 trillion stimulus that he calls “Phase 4.”
It’s designed to jumpstart America’s economy after the downturn. More than $2 trillion could be spent on huge infrastructure projects including water systems, roads and the healthcare system.
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Yours in Health & Wealth,
Ian Wyatt