On Monday April 21st, West Texas Intermediate (WTI), the US crude oil benchmark, traded for the first time in history at -$40 per barrel. This all-time low raised the eyebrows of many observers and begs the question of how we arrived at such an unprecedented scenario. Furthermore, we have to ask how this will impact the green agenda.
Looking more closely at the causes of the WTI crash, we can identify at least three main factors. On one hand, the underlying source of market contraction links to the plummeting global demand for energy. According to the International Energy Agency’s market report for April 2020, demand has withered in the past couple of months.
With the world’s economies shut down and demand for transport significantly scaled back due to the COVID-19 pandemic, demand is on track to shrink by 20 to 30 million of barrels per day (mb/d). In the USA more specifically, this comes as we head into peak consumption season, further predicting the collapse.
On the supply side, March 8 was the indicator for things to come as Saudi Arabia and Russia announced further increases in oil production effectively initiating a price war. As the two nations battle for market share and in a growingly unstable market balance, the immediate response in the United States was a precipitous fall in prices as traders and other market actors scrambled to secure dwindling storage capacities.
With the fear of storage imbalance came a rush to get rid of excess assets, and this culminated on April 21st as the May contract expiry loomed closer. An equally unprecedented 10 million barrels a day cut from the major producers was not enough to balance the slashing of demand. Ultimately as traders worked to offload contracts for oil to be delivered when no storage was available, prices reached unprecedented levels.
In the midst of a global pandemic, and as countries begin drafting COVID-19 exit strategies, investment in the energy field will play a crucial role in bringing the economy back to speed. In Europe, the current push for a long-term green recovery will be impacted by cheap oil.
In normal times bad news for the climate, yet these are not quite typical times. Stakeholders may think twice before injecting the capital required to restart large fossil fuel projects at a time when there is a strong political push to decarbonize all sectors.
The moment when oil went negative was caused by a perfect storm of global events and is unlikely to be repeated soon. At the same time, it is a milestone in the lifecycle of the oil industry in that it gives a window to the future. It is clear that global oil reserves are more than enough to supply current consumption long past Europe’s objective of climate neutrality by 2050. At the same time, if oil consumption for energy is reduced in line with what’s needed to keep global warming below even 2°c, the mismatch between supply and consumption could lead to more crunches in decades to come.
Most oil companies have recognized this and are actively investing in new technologies to diversify their interests. Their expertise in offshore operations, carbon capture and storage, and renewable liquid fuels will undoubtedly provide some of the technologies required for reaching net-zero. This moment could serve as the catalyst for even more activities in this sector, motivated by economic realities as well as climate imperatives.
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May 28, 2020