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By David Gaffen
April 26 (Reuters) - The magnitude of how damaged the energy
industry is came into full view on April 20 when the benchmark
price of U.S. oil futures, which had never dropped below
$10 a barrel in its nearly 40-year history, plunged to a
previously unthinkable minus $38 a barrel.
In just a few months, the coronavirus pandemic has destroyed
so much fuel demand as billions of people curtail travel that it
has done what financial crashes, recessions and wars had failed
to ever do - leave the United States with so much oil there was
nowhere to put it.
While the unusual circumstance of negative oil prices may
not be repeated, many in the industry say it is a harbinger for
more bleak days ahead, and that years of overinvestment will not
correct in a period of weeks or even months.
"What happened in the futures contract the other day
indicated things are starting to get bad earlier than expected,"
said Frederick Lawrence, vice president of economics and
international affairs at the Independent Petroleum Association
of America.
"People are getting notices from pipeline companies that say
they can't take their crude anymore. That means you're shutting
down the well yesterday."
Evidence of the erosion of value for a product that has been
a mainstay of global society since the late 19th century
abounded across the world last week.
In Russia, one of the world's top producers, the industry is
considering resorting to burning its oil to take it off the
market, sources told Reuters.
Norwegian oil giant Equinor slashed its quarterly
dividend by two-thirds. Next week will bring earnings reports
from the world's largest oil companies including Exxon Mobil
Corp, BP PLC and Royal Dutch Shell PLC.
They are all expected to detail additional spending cuts, and
investors will be watching closely for how those companies plan
to manage dividends.
U.S. billionaire Harold Hamm's Continental Resources Inc
sent servicers out into fields in Oklahoma and North
Dakota in the middle of the week to abruptly shut wells, and the
company declared it could not make crude deliveries to customers
due to poor economics.
Continental's decision to declare force majeure - usually
reserved for wars, accidents or natural disasters - came as a
shock, bringing a sharp response from the leading refinery
industry group. But some say there is a logic behind it, even if
it may not pass muster in court.
"You sign contracts based on the average norms that a
society has experienced over the last 100 years. If we have a
new event that is not covered by those norms, it goes into force
majeure. That's what Harold Hamm and others are saying - that
these are circumstances outside the norm," said Anas Alhajji, an
energy market expert based in Dallas.
Even the long-rumored decision by the White House to tell
Chevron Corp last week it could no longer operate in
Venezuela, where it has had a presence for nearly 100 years, met
with a shrug.
"The global climate is terrible," said one person close to a
Western oil company in Venezuela. "The license almost didn't
matter anymore."
The market is forcing the hands of all producers. Across the
world, governments and companies are preparing to shut down
output, and many have already begun.
The Organization of the Petroleum Exporting Countries and
its allies had already committed to record cuts of 10 million
barrels of daily supply that have yet to take full effect. That
commitment was not enough to prevent oil's fall below zero.
Saudi Arabia has said it and other OPEC members are prepared
to take further measures, but made no new commitments. It is a
measure of the depth of demand destruction that even if OPEC
stopped producing altogether, supply may still exceed
demand.
More than 600,000 barrels per day in production cuts have
already been announced in the United States, along with another
300,000 bpd of shut-ins in Canada. Brazil's state-run Petrobras
has reduced output by 200,000 bpd.
Azerbaijan, part of the group of nations known as OPEC+, is
forcing a BP-led group to cut output for the first time ever.
Oil majors in those countries have generally been excluded from
government-imposed cuts.
“We have never done it before since they came to the country
in 1994 and signed the contract of the century,” a senior Azeri
official told Reuters.
That accommodation can no longer be made with the world
running out of space to put oil. As of Thursday, energy
researcher Kpler said onshore storage worldwide is now roughly
85% full.
Demand is expected to fall by 29 million bpd in April, the
International Energy Agency estimated. Paris-based IEA expects
consumption to pick up in May, but researchers cautioned that
its expectation of a mere 12 million bpd fall in year-over-year
demand may be too optimistic.
"I'm sure hearing the same numbers about demand destruction
of 20 to 30 million barrels a day," said Gene McGillian, analyst
at Tradition Energy, who was working at the New York Mercantile
Exchange when U.S. crude futures were launched in 1983. "Until
we see some kind of alleviation of that, you have to wonder what
is in store."
(Reporting By David Gaffen; additional reporting by Olga Yagova
in Moscow, Dmitry Zhdannikov and Ron Bousso in London, Devika
Krishna Kumar in New York, Luc Cohen in Caracas and Gary
McWilliams and Jennifer Hiller in Houston
Editing by Marguerita Choy)
