Crude prices in America’s oil capital are getting dangerously close to zero.
Buyers bidding for crude in Texas, the birthplace of the shale revolution, are offering as little as $2 a barrel for some oil streams, a precipitous markdown from a month ago. The slumping value of physical barrels is raising the possibility that Texas producers may soon have to pay customers to take crude off their hands.
Negative prices have already hit more obscure corners of the American oil market amid a bearish trifecta of collapsing demand, swelling supplies and limited storage capacity. The first U.S. grade to bid under zero was a small landlocked crude stream known as Wyoming Asphalt Sour, which went for negative 19 cents a barrel last month.
In Texas, prices are heading in that direction. A subsidiary of Plains All American Pipeline bid just $2 a barrel for South Texas Sour on Friday, while Enterprise Products Partners LP offered $4.12 for Upper Texas Gulf Coast crude this week, according to pricing bulletins.
Offers could fall further if benchmark West Texas Intermediate crude futures -- which have lost three-quarters of their value this year -- continue to tumble. WTI closed below $20 a barrel this week for the first time since 2002. That bodes ill for producers locked into contracts with suppliers, as the daily price they earn for their crude moves with the broader market.
“I’ve never seen Texas crude oil transition to negative price” but it’s possible, said Andy Lipow, president of Lipow Oil Associates LLC in Houston. “It’s happened in the natural gas market at the Waha hub in west Texas,” Lipow added.
Fast depleting storage is still a major issue against a backdrop of unprecedented demand destruction from the coronavirus pandemic, and these could pressure prices below zero fast, Lipow added.
There is still at least 150 million barrels of available capacity. “But it’s the fill rate that is likely alarming the market, said Reid I’Anson, a global energy economist at Kpler, an industry research firm. Stocks at the key storage hub at Cushing, Oklahoma, have risen 18 million barrels in three weeks, which is 20% of shell capacity, he added.
The good news is that negative prices -- if they do occur -- will probably be “extremely temporary,” said John Auers, executive vice president at energy consultant Turner Mason & Co. Under those circumstances, ultimately, supply will be forced to shut in, he added.
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