Contracts for early May deliveries of West Texas Intermediate crude oil are absolutely crashing on April 20. At this writing, those contracts have gone negative. Yes, you read that right. Oil traders are now paying buyers to take U.S. futures for May delivery. At this writing, the price for those contracts is ($37.45) per barrel, meaning traders are paying that price per barrel to unload those early May deliveries. At the same time, Brent crude futures are holding up much better, down about 8% to $25.83 per barrel.
The disconnect between two of the world's most important oil benchmarks is evidence of just how massively oversupplied North America is right now. Early May U.S. crude deliveries are coming at the absolute worst time. U.S. oil storage facilities are filling up quickly, and those May deliveries of West Texas Crude may not have anywhere to go.
Global production cuts nowhere close to balancing the market
A recent deal between OPEC and other global oil powers is slated to take almost 10 million barrels per day off the market soon. This is by far the largest agreed-upon reduction in oil production in history, equal to about 10% of global output and almost 10-times larger than the cuts OPEC originally planned in early March.
Yet even this massive reduction in global production won't come close to bringing supply and demand into parity. Global demand is expected to fall 30% or more in April, and a slow economic recovery as spring turns to summer could mean global demand stays down far more than the 10 million daily barrels producers are expected to remove from the market.
Moreover, those cuts won't kick in until the start of May, so Russia, Saudi Arabia, and others will have continued pumping at even higher levels for weeks prior to the implementation of those cuts. Analysis indicates that the actual amount of reduced production will be closer to 6 million to 8 million barrels per day from recent levels, versus the 10 million barrel-per-day cuts, which are based on February and March production.
A painful, slow recovery expected
Eventually oil demand will pick up as travel and economic activity start to recover, post-COVID-19. But that recover is expected to be gradual, and in the interim, oil inventories -- as well as supplies of refined products -- are expected to remain at record levels, as producers have been incredibly slow to respond by cutting production, and there's more imported oil en route to U.S. markets. Saudi Arabia has hired at least 15 tankers to deliver almost 19 million more barrels of oil to the U.S. soon.
It's expected that many independent oil producers and some oilfield service providers won't survive the downturn. Whiting Petroleum (WLL) has already filed for bankruptcy, while Chesapeake Energy (CHKA.Q) has brought on restructuring experts, in what is widely considered a pre-bankruptcy move.
Banks have stopped all meaningful new lending to U.S. producers, and are expected to seize assets and establish independent operations until oil markets have recovered, instead of taking the massive losses to sell off assets in this environment.
Retail investors who are considering investing in oil and gas should read this before taking any action, particularly outside any of the largest, well-capitalized integrated oil and gas majors.