What Happened to the Price of Oil?
Implications for Mineral Rights Owners and Investors
On Monday, the oil surplus in America came to a head. The May 2020 futures contract on West Texas Intermediate (WTI) went negative. It’s the first time in history we’ve seen prices that low. Essentially, people who had oil to sell had to pay people to take it from them. However, the price that we find more telling of where the market currently stands is the June futures contract, which is in the range of $16. The positive out of this is that the June contract (and those farther into the year) is showing prices that are more realistic and they are positive. According to Bloomberg, “Since the start of the year, oil prices have plunged after the compounding impacts of COVID-19 and a breakdown in the original OPEC+ agreement.” With no end in sight, the virus generated demand destruction for the commodity, and producers around the world continued to pump more oil than can be used on a daily basis. This supply demand imbalance has caused a fire-sale among traders who do not have access to storage. Because of this dynamic, the world's storage facilities are filling up. Compounding this are traders who are mainly financial entities and are either unable or unwilling to own the oil and do not want to deal with finding a place to store it which is getting increasingly expensive. It is this last point that highlights the current conundrum: Storage. Within the United States, there is a dearth of locations available for the physical stockpiling of oil. Until demand picks back up, we could be looking at continued stress in the oil markets. The NY Times reports, “The problem isn’t limited to the United States. Out of an estimated 6.8 billion barrels of storage in the world, nearly 60 percent is filled, according to data assembled by various energy consultancies. Storage is almost completely filled in the Caribbean and South Africa, and Angola, Brazil and Nigeria may run out of warehousing capacity within days.”
What are the long-term investment implications?
Those invested in oil markets should be prepared for continued volatility. As 2019 ended the world was using about 100 million barrels of oil daily, but COVID-19 has caused the global economy to dramatically slow. According to the US Energy Information Administration, US gasoline usage is down 18% in the last 4 weeks. Leading oil producers saw this demand decline, but until very recently have not moved to reduce supply, and so with supply exceeding demand, prices have dropped. We could have a deal struck between Russia and Saudi Arabia this week or next that would lead to a curtailment in global supply vs the “false” deal announced last week. That deal attempted to cut production by about 10 million barrels starting in May, with a further 5 million cut from other G-20 countries. However, we are uncertain how long COVID-19 will impact the global economy. So, it is difficult to forecast when demand for oil will return to pre-COVID-19 levels. In addition, when the global economy starts to re-open for business, the oil in storage beyond normal operating parameters will need to be used before prices really can return to some form of longer-term stability. A "real" deal is needed because until the price of a barrel of oil is in the range of $40, we believe US oil companies will struggle to make a profit. We think the best thing that could happen for energy markets would be for American life to return to “normal”. With most of America under “Shelter at Home” orders, any return to “normal” seems light years away. Until there is a cut in production from the producers in the energy space (OPEC+ and Russia), the price of oil will be diminished.
How do I protect my investments and assets?
The Bakken has faced obstacles before, and we will again. For more than 100 years, First International Bank & Trust has been based in the Bakken and Three Forks Formations; we know your struggles and concerns because we share them. Our Mineral and Land Services experts are here to help you navigate the complexities of mineral and gas rights through the ups and downs of the market.
There’s no denying, tough times are likely to continue for the near future. Having an experienced team to protect your interests has never been more critical. Know that with us, your minerals are in the best hands. We are in this together, and we will get through this together.