ANALYSIS - WTI Oil Price Collapse Driven By Refining Shortage, Length Of Downturn Uncertain

WASHINGTON (Pakistan Point News / Sputnik - 21st April, 2020) The lapse in building US refineries and the coronavirus lockdown helped drive the recent crash in oil prices while prospects for a recovery long-term remain uncertain, analysts told Sputnik.

On Monday, the price of May futures for West Texas Intermediate (WTI) fell into negative territory for the first time in history, settling at -$37.63. The price of May futures was able to rebound to around $10 per barrel by Tuesday afternoon, but far below the $20-$28 range it had traded at in the past month.


US President Donald Trump in response to Monday's oil price crash said the United States would top off its strategic petroleum reserve. On Tuesday, Trump announced plans for a massive Federal rescue program for the energy extraction industries.

Former London merchant banker and financial analyst Martin Hutchinson said a desperate shortage in storage capacity and refining capability within the United States was a Primary driver.

Because of environmentalist pressures, not a single new oil refinery has been constructed in the United States since 1977 when Marathon Petroleum built the last major one in Garyville, Louisiana, Hutchinson told Sputnik.

"Since then, the environmentalists have allowed no new ones to be built. That is the real cause of it," he said.

Retired Brown University Assistant Professor of Economics Barry Friedman agreed that the phenomenon was an unprecedented one generated by an inability to store sufficient oil.

"This means that there is no storage capacity to be had. If there were empty storage, prices would have stopped at a positive price that a storage owner could earn by accepting delivery and delivering the oil in the next future contract month," he said.

Ball State University Professor of Economics Cecil Bohanon said that in addition to storage issues the Saudi-Russian struggle for market share and the nationwide lockdown to contain the coronavirus also contributed to the decline in the WTI price.

"When most automobile owners are under stay-home directives, the demand for gasoline declines," Bohanon told Sputnik.

The Ball State professor also said this is a very special case that reflects a lack of facilities to store the oil.

While negative prices are news because they are so unusual, he suggested, the more interesting issue is whether spot prices will fall below $10 per barrel. Oil is less scarce than it was before the crisis, but still a valuable resource, he added.


On Monday, Trump blamed short-sellers for the price collapse and said it was simply the result of a financial squeeze and there should be a rebound shortly.

"Of course the situation is temporary and cannot last. September oil futures are still trading in the $30 per barrel range," Hutchinson said.

Friedman agreed that cyclic fluctuations in supply and demand had to be factored into the latest price flows.

"It's a bit of give and take, as usual when any particular price falls. Producers will earn less money and generally the higher cost producers (price < marginal production cost) will cut jobs and output at the new lower prices for future months," Friedman said.

Environmentalists who wanted high energy prices to force the economy to convert to wind energy and other renewable sources would hate the oil price collapse, but to some degree market forces would eventually compensate for it, Friedman said.

Friedman added that a longer term force keeping oil prices down was Saudi Arabia's determination to gain maximum market share for itself by keeping production high, despite its recent agreement with Russia to cut back on output.

Bohanon said he is becoming increasingly pessimistic given the COVID-19 shutdown.

"The longer the shut-downs, the possibility that restriction might be re-imposed and the damage that is yet to unfold outside the USA and Western Europe, in places such as Russia and India, lead me to believe it will take a long time to sort this all out. Look for depression like statistics on income growth and unemployment levels," Bohanon warned.

In oil producing areas, Bohanon added, the price crash could lead to a rash of bankruptcies, straining the local banks.

University of Texas at Austin Clinical Associate Professor of Finance, Warren Hahn, said the primary driver is demand destruction due to the COVID-19 shutdown of businesses, and especially, of transportation which is the major user of oil.

The situation has been exacerbated, Hahn added, by oversupply of the oil markets due to the Saudi and Russian disagreement over cuts and managed production levels.

"It depends on the pace of economic recovery from COVID-19. Given the severity of the oversupply situation, it will take at least a year for markets to clear and regain search for equilibrium, even in the best case," Hahn told Sputnik.

The US will see short-term negative effects due to devaluation of oil & gas companies and oilfield service companies and other derivative/related industries.

"Longer-term effect will trend toward neutral when businesses start to resume operations and benefit from much lower energy costs and individual consumers also keep more money in their pockets due to paying less at the pump," the University of Texas professor said.

OPEC+ oil producers reached a new agreement on April 12 to collectively reduce oil production by 9.7 million barrels per day (bpd) for two months, starting from May 1. After that, production will be cut by 7.7 million bpd for 6 months, until December 31. From January 2021 to April 2022, OPEC+ states will cut oil production by 5.8 million bpd.

Bohanon said it is not clear whether US co-operation with OPEC is a 'one-off' or whether this portends more US co-operation with the world cartel.

"If another president had been in office less sympathetic to domestic oil interests the result may have been very different," Bohanon said.

Hahn predicted that undiversified oil-exporting countries are going to experience severe economic pain in the short term due to loss of revenue.

"Although the US and the Saudis have had somewhat of a working relationship, there have been no real dealings with the rest of OPEC and I wouldn't expect that to change - the political differences are too great for any real cooperation to occur," he said.

Hahn also pointed out that much could hinge on what happens to demand for renewable energy and related products.

"It is now considerably cheaper to buy and operate an internal combustion vehicle, relative to just a few months ago - how will that affect demand for hybrid and fully-electric cars? Also, natural gas prices have been less affected by COVID-19 - will energy companies rebalance their portfolios from oil toward natural gas investments?" Hahn said.