Market participants watched in disbelief as United States crude oil futures crashed to negative levels for the first time in history due to the lack of demand brought on by the Covid-19 pandemic and rapidly disappearing storage space.
Monday’s collapse of West Texas Intermediate crude oil futures was unprecedented, just like the conditions that caused the fall in the first place, with May futures (due to expire on Tuesday) plummeting to minus $37.63 per barrel on Monday, April 20. The plunge came despite record output cuts agreed by OPEC, Russia and other producers the previous week, which were considered not nearly enough to offset the loss in demand.
Traders explained that the crash had been caused by the absence of demand as refiners are not currently processing much oil and there is no storage space to place May contract deliveries expected to arrive in the U.S. Gulf next week. The negative prices mean that producers or traders would be paying customers at Cushing, Oklahoma, to take oil off their hands if they were in a position to do so, as there is nowhere to put it, sources said.
Refiners throughout the U.S. have either cut back refinery run rates by about 30 percent, or have opted to shut down operations because demand for gasoline and other fuels has fallen due to drastically reduced driving, given coronavirus stay-at-home orders.
“These refineries have cut back as far as they can go, and a rule of thumb is that 30-35 percent is the maximum amount they can cut. If they run the refinery at below 65 percent of capacity, they risk damaging the equipment,” an industry source explained. In some cases, refineries have had no choice other than to shut down operations, sources added.
The domestic crude inventories are at record highs. “A lot of this was the result of refineries cutting back crude runs. Makes sense as demand has dropped by 20 million barrels per day. Watch the gasoline storage availability, which could be a much bigger problem than the crude storage, and force further refinery cutbacks,” a source at The Tank Tiger Storage Bulletin commented.
These cuts have naturally affected base oil production rates as well, but since consumption has also been down, the reduced output was expected to help keep the growing surplus in check.
“Most lube refineries are running at 70 percent but, they can run at 50 percent if needed. The fuel side on their production cannot run at 50 percent, but the lubes side can,” a source explained.
A major U.S. Gulf producer was heard to have taken one of its base oil trains off-line, and other producers may follow, if they have not already done so, sources speculated.
Participants pointed out that once plants are taken off-line, it takes time and is costly to bring them back up when market conditions improve. “Meanwhile, the refinery may find that the feedstock they use to make base oil can be more profitably used to make fuels,” a source noted.
The reduced driving and transportation in the U.S. has led to fewer oil changes, triggering a significant drop in the collection of used motor oil. As a result, several base oil rerefineries, which rely on used oil as feedstock, have been running at reduced rates, or were forced to shut down. However, some continued running at normal rates, including a rerefinery in the Chicago, Illinois, area, one in Atlanta, Georgia, and one in Columbus, Ohio, according to sources.
Very little base oil is changing hands these days, with spot prices difficult to pin down due to the lack of transactions, and contract buyers taking only minimum quantities, or postponing shipments whenever possible. Export business has slowed down substantially as well.
Upstream, WTI to be delivered in May continued to trade in negative territory on Tuesday, but ended rising from Monday’s eye-popping negative levels to about $10 per barrel. The contract for June delivery was down by 43 percent from the previous session and closed below $12/bbl. By comparison, crude oil was trading at around $60/bbl at the beginning of the year.
The Chicago Mercantile Exchange (CME) platform had to make emergency changes so as to even allow trading at negative numbers, media sources reported.
The vertiginous fall in WTI levels also dragged Brent prices down. “The drop, sparked by a perfect storm of COVID-19 fueled demand destruction and global crude storage facilities reaching their limits, is unlike anything markets have ever seen. And it’s left even the most veteran industry players scratching their heads,” OilPrice.com reported.
On Tuesday, April 21, May WTI futures, which expired on Tuesday, settled at $10.01 per barrel on the CME/Nymex, and had closed at $20.11/bbl on April 14. June WTI futures settled at $11.57/bbl, and July futures at $18.69/bbl. (CME Group closed its Chicago trading floor as a precaution on March 13; all products continue to trade on CME Globex).
Brent futures for June delivery closed at $19.33/bbl on the CME on April 21, from $29.60/bbl on April 14.
Light Louisiana Sweet crude wholesale spot prices settled at -$34.73/bbl (minus) on April 20 and had closed at $19.11/bbl on April 13, according to the Energy Information Administration.
Low sulfur vacuum gas oil and high sulfur VGO were trading at June WTI plus $4/bbl (or $15.57/bbl) on Tuesday, April 21, and were trading at WTI plus $5.25/bbl ($25.36/bbl) on April 14, according to OPIS/PetroChem Wire assessments.
Note: As we are all affected in one way or another by the devastating coronavirus crisis, our most sincere thanks go to the brave and dedicated first responders, health care providers and other essential personnel who work tirelessly to protect us, secure our food supply, and keep us safe.
Gabriela Wheeler can be reached directly at gabriela@LubesnGreases.com.
Lubes’n’Greases Publications shall not be liable for commercial decisions based on the contents of this report.
Historic and current base oil pricing data are available for purchase in Excel format.