Categories: BusinessCommodities

Oil price fluctuation is the ‘new normal’ for now


The previous week was a roller coaster ride of emotion for oil investors and stakeholders as oil prices went negatively lower again.

While prices have since then slowly picked up, these intense value fluctuations may be the new normal in oil prices in the near future due to dwindling worldwide demand and an inability to store a surplus of material.

The price crash happened despite efforts by the Organization of Petroleum Exporting Countries and its allies (OPEC+) last March to curtail oil production in order to address the shrinking demand for petroleum-based products.

The smaller market was brought about mostly by reduced local and global travel brought about by the coronavirus pandemic as people struggled to contain the virus by sheltering at home.

Oversupply woes

Normally, the surplus would just be stockpiled by individual nations for use when the market picked up once again, theoretically, after the threat of the coronavirus had passed.

However, the bigger problem facing producers and stakeholders right now is that the world is slowly running out of space to store the surplus.

The majority of the world’s oil storage facilities are now at 85% capacity, per Reuters, but supplies of oil harvested from oil-producing nations are still being delivered to their destination ports, with at least 40 million barrels of the product destined for the U.S. alone.

Refineries have resorted to renting additional space for the surplus, which became an added expense on a product whose market value is already beginning to cut into profit.

Frederick Lawrence, Vice President of economics and international affairs at the Independent Petroleum Association of America said:

“What happened in the futures contract the other day indicated things are starting to get bad earlier than expected. People are getting notices from pipeline companies that say they can’t take their crude anymore. That means you’re shutting down the well yesterday.”

Oil companies continue production

According to The Hill, one reason for the oversupplied market is the fact that oil companies would rather keep producing, despite only mitigating losses, than stopping production altogether, which would mean the companies would have to absorb the full loss.

OPEC+ had said that it was open to further rollbacks in production in future months but has not released any further information so far. This might change in the next few weeks as quarterly earnings reports from the biggest oilers in the industry are set to be released early in May.

This would give investors a better idea of where their investments stood at this point in history. It would also give industry leaders the information necessary to direct production in the months to come.

Cuts and prospects

Individual oil producers have initiated mitigating cuts into expenditure in hopes to alleviate the market’s effects on dividends. The Royal Dutch Shell PLC, for example, has detailed spending cuts designed to address this.

Continental Resources Inc., meanwhile, has shut off its wells in the U.S., while stopping deliveries of crude oil to its customers.

The OPEC+ decision to cut back on production by 10 million barrels per day (bpd) has yet to take effect, with officials targeting May 1 as the starting point date. CNBC reports that production has already gone down to 67%, which means that slight adjustments in bpd prices may be just over the horizon.

It all boils down to how soon and how effectively the industry can manage the problem of oversupply and limited storage resources. Should these two be managed efficiently within the next few weeks, then oil prices can be expected to remain relatively stable.

Image courtesy of kloxklox_com, TheoRivierenlaan/Pixabay

Martin Cruz

Writer and independent business owner who loves fiction, food, felines, and the F-cleft.

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