Underlying Monday’s financially driven oil price rout are physical markets that are in extreme turmoil as they contend with severely reduced demand resulting from the COVID lockdowns and rapidly filling storage tanks. In the Permian Basin, the epicenter of U.S. shale oil, the crude benchmark price — WTI at Midland — on Monday crashed to a historical low of negative $13.13/bbl before rebounding to a positive $13.01/bbl Tuesday. The same day, prices at the Permian natural gas benchmark Waha revisited negative territory for the third time this month, with a settle of minus $4.74/MMBtu for Tuesday’s gas day. Negative supply prices aren’t new to Permian producers, at least for gas — Waha settled as low as minus-$5.75/MMBtu in early April 2019. But up until a couple months ago, oil prices were supportive enough to keep producers drilling regardless. Now, that’s all over, at least for a while. What can we expect now that negative oil prices have arrived in the Permian? Today, we’ll dissect the latest bizarre pricing event to rattle the Permian natural gas and oil markets.
We said this yesterday in One Way Out, but it bears repeating: the crude oil market entered the twilight zone Monday when WTI at Cushing not only collapsed below zero but went as negative as minus-$40.32/bbl and settled the day at minus-$37.63/bbl. The extent of Monday’s trouncing was shocking and, as we explained yesterday, worsened by a few financial players who got caught having to unwind long positions for May delivery just a day before the May contract was expiring, because they had no way to take physical delivery. To get out of their predicament, they ended up having to pay “buyers” to take them out of their positions. That was Monday. On Tuesday, with the financial trading crisis resolved, the May contract recovered to positive territory to expire at $10.01/bbl, up almost $48/bbl from the previous day. The June contract, which had remained relatively supported Monday near $20/bbl — fell to converge with the expiring May contract, down nearly $9/bbl to $11.57/bbl Tuesday.
While certainly extreme, the negative pricing was not entirely a surprise to many in the industry — we’ve been sounding the alarms in our blogs for a few weeks now, given that underpinning Monday’s paper-trading chaos, there are very real, fundamental constraints that the market has been building up to for weeks now. Namely that the restrictions to mitigate the COVID contagion have throttled U.S. refinery demand for crude and crude supply has been moving in droves to storage tanks at Cushing and along the Gulf Coast that are rapidly approaching capacity. Nowhere are the impacts of these dynamics more evident than in the shifting prices and price relationships in and around the Permian, the U.S.’s largest shale oil basin, where both oil and gas prices turned sharply negative Monday. Clearly, the negative prices are signaling a broken supply-demand balance. But what are the physical market dynamics behind these price levels and how will the market navigate them in the coming weeks as constraints continue to worsen?
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