The oil market is in freefall. The sector collapsed into pandemonium last week when the West Texas Intermediate (WTI) oil price benchmark fell below zero for this first time in history, making U.S. oil not only worthless but a liability, closing at -$37.63 a barrel on Monday.
While WTI has since recovered considerably, but its future is uncertain. If last week has taught us anything it’s that all bets are off. Now the question on the mind of many is, if it was possible for U.S. oil to go so deeply negative, is the same historic nosedive in store for Brent Crude, the international oil price benchmark?
The answers vary. One leading oil economist told Energy Voice that it would “require something cataclysmic” for the Brent benchmark to follow U.S. crude into negative pricing. But when Bloomberg posed the question “Can Brent crude oil follow WTI into negative territory?” the answer was an unequivocal: “You bet.”
The negative prices are the result of a monthslong crisis in oil markets, beginning with a plummet in oil demand around the globe thanks to the spread of the novel coronavirus. As economies around the world shut down, the leading OPEC+ members of Saudi Arabia and Russia were pressured to find a solution, but instead, their talks quickly devolved into an all-out oil price war, flooding the international oil market with a huge glut of crude oil to the tune of about 10 million barrels of oversupply per day. Last week, the glut reached critical mass when the volume of oil on the market maxed out oil storage capacity around the globe, driving the nosedive of oil prices all the way below zero (well below) in the United States and Brent hit an 18-year low at just $20 a barrel.
In an article published last Tuesday, Energy Voice reported that despite Brent’s dire straits, “Professor Alex Kemp of Aberdeen University does not foresee it going down the same path to zero or negative pricing.” The petro-expert told reporters that “The two prices, WTI and Brent, are in some ways linked but, to some extent, they are separate.
The main reason being that Brent reflects the world balance of supply and demand and WTI reflects the position inside America. [...] We wouldn’t get negative prices for Brent because Brent is the world market and it would require something cataclysmic for the world economy to get a negative Brent price.”
Other experts, however, are taking the opposite view and preparing for Brent to go negative. “ICE Futures Europe Ltd. confirmed on Tuesday night that it’s preparing various Brent prices for just that possibility if there’s the demand to do so -- even if there’s still a long way to go before that happens since June contracts are trading at about $20 a barrel,” reported Bloomberg on Wednesday. “Beyond the mechanistic side of negative pricing there’s also a market reality: the world’s storage sites are filling with crude fast -- the precise concern that caused West Texas Intermediate to turn negative.”
Brent does not function in the same way as WTI, however. “While the Brent futures contract is cash-settled against the value of the Brent index price, the WTI contract is physically settled, meaning a trader must take delivery of barrels of oil at Cushing in Oklahoma, hundreds of miles from the coast.”
This does not change the fact that oil storage is filling up around the globe, and filling up fast. “Well over 100 million barrels of oil is now being held in floating storage -- by another estimate more than twice that. [...] With on-land sites either completely booked up or filling fast, there’s still pressure on Brent.” We’re not out of the woods yet.