Crude oil prices hit their lowest level since 1986 and are down more than 80 per cent since the beginning of the year to levels below break-even, that has forced Canadian producers to cut production.
As of Monday afternoon, the price of North American benchmark West Texas Intermediate (WTI) crude oil dipped 300 per cent to close at negative $37.63 a barrel — which meant producers were paying buyers to take their product.
The WTI trading hub in Cushing, Okla., is expected to hit capacity within four weeks.
“We’ve never seen anything like it before: so much oil, not enough demand and not enough tanks to store it in,” said energy expert Richard Masson, an executive fellow with The School of Public Policy at the University of Calgary.
Masson said we got to this point thanks to COVID-19 stay-home orders — because people across North America aren’t travelling by car or plane as often, there’s been a huge drop in demand. Also, fully stocked airlines and refineries aren’t necessarily looking for new oil deliveries.
“Global demand has been about 100 million barrels a day, and with everyone staying home around the world, demand has dropped by about 30 million barrels a day,” Masson said.
“Even though OPEC is cutting production — storage is filling up all over the world.”
The reason the drop happened Monday is because oil contracts are traded on a month-by-month basis, and May contracts for WTI are up this week. The prices dropped to the negatives because some companies simply don’t have the space to accept any more oil, according to Masson.
“Right now they have to pay 35 dollars per barrel for somebody to take that oil off their hands,” said Masson.
After dropping briefly into the negatives on the weekend, Alberta-produced Western Canadian Select — whose price is based on a discount to WTI — closed Monday above $9 a barrel, but its also expected to see negative trading days in the future — at least until demand increases — Masson said.
“The only thing that’s really going to get this market balanced, is people starting to drive and fly again, and demand going back up.”
The prices for June contracts are still trading above $20. But another economic expert said that’s optimistic — and even if that number sticks, there could be big drops in the future.
“The market thinks there’s going to be less pressure on those contracts, on inventory space then ,” said Rory Johnston, managing director and market economist at Price Street Inc.
“My expectation is that, as we kind of roll out of May and into the June contract, we’re going to see a big rally in prices… but eventually those prices start falling again to create the market for storage space in June.” Johnston said.
Johnston agrees that the only thing that will truly allow oil prices to bounce back will be once COVID-19 restrictions are lifted and people start to need fuel again — but that also depends on several factors.
“ whether or not you would begin to see government begin to reopen economies — whether or not people actually follow suit, and actually go out and do things once the economy is reopened,” he said.
“It doesn’t seem likely that we’re going to be seeing a huge bounce-back in air travel anytime soon.”
Kenney makes public appeal for federal support
Last week the federal government announced more than $2 billion worth of support for the industry, with the majority of it being put towards cleaning up orphaned and inactive wells.
Premier Jason Kenney said Monday that the negative prices “further underscores the devastating impact of recent events on the largest industry in this province,” and that he believes the federal government should be offering more support.
“Much more action is needed,” Kenney said. “I join with premiers from coast to coast, and many other key leaders of the Canadian economy, including the heads of the largest banks and financial institutions — who understand that this is not an Alberta issue.
“This is not an industry-specific issue, that this strikes right at the heart of the entire Canadian economy.”
Kenney said he was once again making a public request for federal action.
“If we see the current negative price situation continue for any period of time, the implications obviously for this industry are are very serious,” he said.
— With files from The Canadian Press
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