Free Oil & Refiner Troubles?
The morning of April 20, 2020 started out like any other day in the energy markets. International oil pricing markets nudged up and nudged down - as the day proceeded, the United States benchmark price for crude - known as West Texas Intermediate (WTI) dropped below zero dollars for the first time in recorded history.
As the morning turned into the afternoon the price kept falling. By the end of the day the future contracts for May delivery of West Texas Intermediate oil tumbled to negative, yes, you are reading this correctly, negative $37.63 a barrel!
Oil producers in the United States and Canada had walked into a serious problem they had never experienced before.
Tank farms where excess oil is stored all over the United States and Canada were near full, and tanker ships all over the world were full. No one was buying. The world supply was being pumped at record levels because of a turf war between Russia’s Putin and the Saudi Royal Family…
Oil producers had to pay refiners to take oil away. In Saint John New Brunswick Canada, it’s Premier stated:
“I worked in the refinery for many years and apparently in the last month there was actually a free load of crude oil that came through the Panama Canal,” said Premier Blain Higgs, while speaking remotely to a business audience.
“Now they had to pay transportation, but imagine negative cost for crude.”
As oil rebounded from negative futures trades in the month of May onwards, it continued to have daily spot trading in the negatives for a period of time. As crude was recovering back into the positives, a lot of crude was purchased at really low prices or in some cases was “purchased” for free. Some argue the really low prices were never truly reflected at the gas pump. We began to hear and see news stories about gasoline demand being low and we were told gasoline prices must go up at the pump to compensate for this low demand.
Well if you are buying West Texas Intermediate (WTI) crude instead of Brent crude (which you can think of as European crude), you are saving anywhere from $3 a barrel to $10 a barrel depending on the day. That means if you are buying hundred of thousands of barrels of crude every day you are saving a LOT of money…
What does all of this mean for you the consumer? Well gasoline & diesel prices throughout North America are decided by a benchmark known as Daily New York Harbour (NYH), which is costed off of Brent crude NOT West Texas Intermediate. So if you were a refiner or marketer you end up with “free” profit because gasoline was made from the cheaper priced West Texas Intermediate crude…
Expect to see more oil market disruption as the global automotive markets shifts to electric vehicles, see charts below.
Expect to see Iran and Iraq eventually get there act together and muscle in on the global oil markets which will leave both Saudi Arabia and Russia unhappy and drive global prices down again.
It’s important to remember your history when refiners or marketers come with cap in hand and stories of woe. No company is too big to fail. In the face of international market disruption, many should in fact be allowed to die in order to be replaced by newer options.
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Clinton P. Desveaux is an accredited writer for Troy Media and he can be reached at ClintonDesveaux@gmail.com