NORTH TEXAS (CBSDFW.COM/CNN) – The largest cities in Texas, like those across the country, have some type of shelter in place order for residents, that means highways are empty, planes are grounded and factories are dark. It also means an unprecedented collapse in oil demand that has sent crude crashing to 18-year lows.
Supply, on the other hand, remains largely resilient amid a price war between Saudi Arabia and Russia. U.S. producers don’t want to be the first to blink by turning off production.
The result could end with a supply glut so epic that the world will soon run out of room to store all the unneeded barrels of oil.
“The market is starting to signal that not only is there no demand for this crude, eventually there could be nowhere for it to go,” said Jeff Wyll, senior energy analyst at Neuberger Berman.
In other words, storage facilities, refineries, terminals, ships and pipelines eventually could reach capacity — something that hasn’t happened since 1998, according to Goldman Sachs.
Distressed pricing in some corners of the oil market shows that investors are starting to price in the risk that might occur soon.
Although headline oil prices such as West Texas Intermediate and Brent are trading north of $20 a barrel, some regional prices have recently plunged into single-digit territory. That is especially true for landlocked grades of crude where access to storage is even trickier.
“Demand is falling so fast relative to supply that very soon many producers’ main issue is not going to be whether they can ensure operating profit but rather if they can find an outlet for their crude,” analysts at JBC Energy wrote in a report.
One storage option: loading all that extra crude onto ships. JBC said about 20% of the global fleet of very large crude carriers (VLCCs) could become floating storage. But even that would not absorb the surplus.
In April, some 6 million barrels per day of “homeless crude” might literally have nowhere to go, JBC said, a figure that would rise to 7 million barrels per day in May.
Shrinking storage capacity means that oil producers in some cases have to pay someone just to take the barrels off their hands.
“The price is trying to go to a level to force companies to keep the oil in the ground. If it has to go negative to incentivize that behavior, then it will,” said Neuberger’s Wyll.
Brent, the global benchmark, is likely protected from this because it’s priced on an island in the North Sea where tank storage is accessible. But other grades of crude are located far from water.
Last year, U.S. natural gas prices in West Texas traded in negative territory for more than two weeks because there were not enough pipelines to carry the gas away.
Of course, the weak demand caused by the coronavirus pandemic won’t last forever.
Eventually, airlines will take to the air again and start buying jet fuel. American drivers will buy more gasoline as they get back to work.
But by that point the oil industry might not be producing as much oil as before because wells shut down. So today’s oil glut may suddenly turn into tomorrow’s oil scarcity, pushing prices sky high.
(© Copyright 2020 CBS Broadcasting Inc. All Rights Reserved. The CNN Wire™ & © 2020 Cable News Network, Inc., a Time Warner Company contributed to this report.)