By Yaw Yan Chong, Director, Oil Research (Asia), Refinitiv
THE US benchmark WTI May contracts collapse into negative territory is a consequence of the US government’s refusal to regulate oil production and impose mandatory cuts, despite calls to do so during the G20 recent meeting that had led to historic cuts of 9.7 million bpd by the OPEC+ alliance.
As of the week of Apr 12, the US was still producing vast amounts of crude at 12.3 million bpd, according to figures from their Energy Information Agency, down from 13 million bpd in March. This is still the largest production figure in the world, and in a pre-production cut environment at that.
The negative price means that producers are willing to pay a certain amount of money, US$37.63/bbl at Monday’s close, to have the oil taken away from them, that the excess supplies have exceeded the capacity to store them. This is a consequence of the still-heavy production coming out of the US, despite the sharp fall in demand globally and specifically in the US, with storage tanks in the country filling fast and running out of capacity.
But it is important to note that this is only for the May contract, which expires today (Apr 21), while the June contract is still positive at around US$20/bbl, signaling that this is a very short-term issue, for now.
It remains to be seen if the June contract will similarly fall into negative territory as it approaches expiry at the end of May. Thus far, the US government has not changed from its policy of imposing mandatory production cuts on its oil producers, and has taken the approach of allowing natural attrition to reduce production.
By mid-April, production has fallen by about 700,000 bpd, and that is clearly not enough. Expectations are that production will fall by 1.7-2.0 million bpd by end-2020. It remains to be seen if the pace of the production fall will enough to stem the collapse in price.