Fears mount negative oil may spark global price plunge

Anxiety is rising that global oil storage tanks could be overrun, shredding Brent prices and strangling local energy producers.

Global storage reaching capacity “could see Brent experience the same fate at WTI,” Credit Suisse analyst Saul Kavonic said. Picture: Mladen Antonov/ AFP.

Fears are growing for the plight of Australian oil and gas producers after Brent crude dropped below $US20 ($32) a barrel for the first time since 2002, further spooking the energy industry after US futures fell below zero for the first time in history.

Concern is now mounting that global storage tanks could be overrun by June, further decimating international Brent prices and sending Australian energy producers into freefall. The Australian government confirmed it will likely buy more supplies for its strategic reserves by taking advantage of falling prices, Energy Minister Angus Taylor said.

Brent crude plummeted as much as 28 per cent late Tuesday to just $US18 a barrel, compared with January highs of $US65 a barrel, while West Texas Intermediate for June delivery fell 42 per cent to $US11 a barrel. The massive price plunge will spark alarm among big Australian gas exporters, with any sustained fall in Brent oil ultimately flowing through to LNG contract prices.

Andrew Liveris, a board member of the world’s largest energy company Saudi Aramco, said Australia would not be spared from the global carnage.

Prolonged prices below $US20 a barrel would “render most LNG balance sheets in deep distress,” Mr Liveris told The Australian. “Most capital expenditure in the fossil fuel world, whether it be LNG or oil, will all be pushed out. There’s no other choice.”

US crude futures fell into negative territory on Tuesday after traders got caught having to take physical crude supplies on the final day of the May contract because the lack of demand meant no buyers needed to buy output. With nowhere to store the barrels prices plunged below zero, meaning some traders were paying buyers to take oil off their hands. The 42 per cent cratering in the June futures contract in the US now suggests a huge period of volatility ahead.

It’s also deepened concern the more influential global Brent pricing benchmark could sink much further should a broader supply glut overwhelm the world’s storage tanks. International stockpiles may reach their limits by June, according to the International Energy Agency, with a quarter of demand wiped out due to the COVID-19 pandemic shutting down economies throughout the world. The world’s biggest oil storage firm, Vopak, said on Tuesday capacity for traders to store crude had all but run out.

Mr Liveris said storage was “maxxed out” and there was concern over how quickly global demand could recover from the COVID-19 economic shutdown.

“Normally in a recovery scenario markets will roll forward and prices will start inching up on the basis that inventories will be consumed,” Mr Liveris told The Australian. “Industrial demand will edge back but transportation fuels may be down for a year or two. That’s the problem.”

As the market stands, all US shale producers would struggle to survive.

“What’s the economic cost of production for shale oil in the US?” Mr Liveris said. “Obviously negative territory you can forget them, $US20 a barrel you can forget a lot of them, $US30 you get a few producing, $US40 you get about half of them producing and anything north of $US50 you get all of them producing. So there’s the big swinger.”

Mr Liveris, who helped create manufacturing policies for both President Trump and Barack Obama, said the stakes could barely be higher in the US.

“You now have this amazing situation where US oil and gas producers and the jobs and economic wellbeing they provide is neutralising lower gasoline prices for the consumer,” Mr Liveris said. “We never had that situation where suddenly you needed a minimum oil price because before it was imported and you never had to worry about it. Now in an election year you can be guaranteed President Trump is going to do everything he can to pressure the other producers Saudi, OPEC and Russia to keep oil prices at the $US40-$US45 level.”

The OPEC oil group, led by Saudi, along with Russia agreed to cut 10m barrels of oil earlier in April but the move did little to calm fears about demand destruction with the output reduction historically huge but still only half the decline in consumption.

A complex web of geopolitical manoeuvring has ratcheted up in the last 24 hours with President Trump considering blocking Saudi Arabian oil imports to safeguard the US’s own oil industry.

While market rumours suggest Saudi may bring forward the timing of any cuts, the ability of Middle East oil giants to make any further meaningful supply reductions looks difficult based on the current volatile market.

“I think the cuts they made were major concessions no question,” Mr Liveris, a Worley board member said. “OPEC+ has basically stepped up and I think everyone is now looking at demand recovery before that conversation begins again. It’s almost not a second quarter topic anymore, it’s a third quarter topic. As we get the stimulus in China, I think most of the supply side is going to wait to see what the demand side does.”

Global storage reaching capacity “could see Brent experience the same fate at WTI,” Credit Suisse analyst Saul Kavonic said. “We remain concerned that global storage could fill within several weeks, leading to material drops in Brent prices below $US20 a barrel, just as we have seen weakness in WTI as storage fills brim.”

Brent below $US20 a barrel, and any further falls closer to single digit territory, would pile enormous pressure on Australian producers to further protect their balance sheets.

“In the scenario Brent drops below $US20 a barrel, we see a risk that balance sheet conversations could arise again,” Mr Kavonic said. “We see oil price and balance sheet risk skewed to downside over coming weeks versus market expectations, leaving us wary near term.”

Big producers Woodside Petroleum, Santos and Oil Search have already taken the axe to spending this year after prices cratered by more than half. Only Oil Search has so far tapped shareholders for equity through its $1.2bn raising, but a longer period of depressed prices may spark further emergency measures.

“The first quarter of 2020 has been one of the most volatile periods in history for Oil Search and the global oil and gas industry in general,” Oil Search managing director Keiran Wulff said after releasing its quarterly results.

Santos said companies had to get through a tough period for the industry.

“With supply chains full and demand suppressed while economies around the world are in hibernation as we fight COVID-19, we must focus on what we can control – our costs and our portfolio,” Santos chief executive Kevin Gallagher said.

Shares in Australia’s biggest listed company, Woodside Petroleum, fell 1.3 per cent to $19.89 on Tuesday. Oil Search fell 6 per cent to $2.50, Santos declined 2.9 per cent to $4.01 and Beach Energy decreased 3.4 per cent to $1.29.