Unprecedented, unbelievable, ‘off-the-scale’ can’t really sum up what happened to oil prices in North America on Monday April 20. Both WTI (West Texas intermediate) and WCS (Western Canadian Select) plunged to below $0 per barrel and recorded an oil price of minus $38 per barrel for the first time in history. Although there has been talk about negative oil prices for months, nobody really predicted anything on this scale.
With significant oversupply in the market, storage in many places at capacity, refining capacity limited and no easy way to export, those who committed to take delivery of the oil production during May 2020 suddenly faced a really difficult decision – either take delivery of the physical oil and try to find a way to market or mitigate their exposure and pay people to take the oil off their hands. The impact of paying people to take away the product paved the way for negative oil prices, which in turn sent shockwaves around the world. Social media was literally buzzing as the news emerged and it was no surprise to see markets reacting across the world.
What played out in North America should send a big signal to all of us. With over a third of the world population and most of the leading economies (including 19 out of the G20 economies) in full or partial lock-down, the world has been put on ice until it can emerge from this global disaster. The combination of oversupply and collapsing oil demand has left a seriously unbalanced market. With demand currently estimated to be down around 30% following the COVID-19 outbreak, supply has to adjust fast. The OPEC+ deal will take effect May 1, but a cut of 10% in world oil production will simply not be enough to offset the decline in demand.
From a UK perspective, the Brent oil price has followed the wider market sentiment and has declined to around $20/barrel, a 20-year low. As the Brent blend is a more globally traded commodity, it hasn’t been impacted in the same impact as WTI.
Lower and more volatile commodity prices will inevitably impact the sector. Many exploration and production companies have already reduced their budgets for 2020/21 and are re-focusing any discretionary funding on lower risk, faster pay-back activities.
Although the UKCS has made great strides in recent years to improve its competitive position, a shock of this nature will inevitably have a material impact on the overall sentiment in sector.
Fortunately, the industry has a track record of responding to similar challenges and this – combined with accelerating activities associated with the energy transition – will be another opportunity to demonstrate the sector’s resilience.
Paul de Leeuw is director of Robert Gordon University’s Energy Transition Institute