- A race between Saudi Arabia and Russia to flood the oil market with inventory could push oil prices below zero, Mizuho Securities said Tuesday.
- Brent crude already trades at its lowest level in 17 years as the oil market faces an unprecedented oversupply.
- If the overseas price war stifles the US’s ability to offload inventory, its storage capacity could reach its limit and force the country to rapidly offload oil, Paul Sankey, managing director at Mizuho, said in a note.
- The market’s current condition faces threats last seen after 9/11, when demand faded overnight, and the financial crisis, when the world economy cratered, Sankey added.
- Watch Brent crude trade live here.
Brent crude oil is at its lowest level in 17 years, but Mizuho Securities sees a scenario that could turn prices negative and create an unprecedented situation in the critical market.
The world’s most traded commodity faces new pressures from a new price war between Russia and Saudi Arabia. The international benchmark slipped as low as $US25.23 per barrel Wednesday morning, bringing its year-to-date losses to 58% and placing further pressure on energy companies tied to the commodity. The oil shock added more stress to economies already struggling with coronavirus fallout and drove major declines in the stock market in recent sessions.
The overseas price war will impede the US’s ability to offload its own oil and create a storage problem in a matter of months, Paul Sankey, managing director at Mizuho Securities, wrote Tuesday. The US exports roughly 4 million barrels of oil per day, but much of that outflow will fade as Saudi Arabia and Russia undercut US pricing.
Mizuho’s analysis pegs the US’s spare capacity at 273 million barrels and estimates the tanks could top out in as soon as four months. The commodity’s value doesn’t move the same way as intangible assets’, Sankey said, and negative prices could become a reality if the US can’t build new storage at the pace of its inventory buildup.
“It pumps out of the ground and has to be consumed or stored. This is not the equity market value of AAPL, or the gauge of consumer confidence. These cannot go negative,” Sankey wrote in a Wednesday follow-up note. “Negative prices are simply a higher cost of storage than market.”
Negative prices would effectively force producers to pay buyers to take barrels of oil.
The oil-price war kicked off March 6, when Russia declined to lower production. The Organisation of the Petroleum Exporting Countries had hoped to curb supply as the coronavirus outbreak pummelled oil demand around the world. Russia’s move prompted retaliation from Saudi Arabia in the form of massive price cuts, igniting a race to claw more market share.
The dire market condition now faces threats last seen after 9/11 and during the financial crisis, Sankey said. The 2001 terrorist attack saw 2% of world oil demand erased overnight and crushed airline business, while the 2008 slump saw a significant downturn in global economic activity.
Sankey believes there’s enough liquidity in the market to avoid the immediate drops seen in 2001 and 2008, but he pointed to the Trump administration’s steady production rate as a threat to price stabilisation. High-price grades would be the first to hit negative levels, he added, as “it exceeds needs and needs to buy storage.”
Brent crude traded at $US25.52 per barrel at 12:50 p.m. ET Wednesday, down 11.5% for the day.
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