Updated 5 p.m. Apr 21
Our expert below noted that Tuesday was likely to be worse than Monday for the oil industry, and he was right. While Monday, April 20, saw the bizarre situation of the futures market going negative as companies paid others to take delivery of the crude they were contracted to buy in May, on Tuesday the rest of the oil market crashed, with prices plunging to just $11.69 for June deliveries of West Texas Intermediate crude oil and the overall price of Brent, the international benchmark for crude oil, dropping 21 percent.
Meanwhile, the Texas Railroad Commission declined to step in and force Texas producers to cut production, which only made the brisk selloff of crude oil move more quickly. The TRC used to do this all the time back in the day, but hasn't used its authority to regulate how much oil is being pumped out of the state since the 1970s.
President Donald Trump has already been pushing Congress to allocate some relief funds to buying oil for the Strategic Reserves, but Congress didn't include that in the last relief bill. Now Trump is calling for administration officials to come up with a relief plan to help out energy companies. As anyone who lived through the 1980s bust can attest, the companies, and the city where so many of them are housed, may well need quite a bit of help if things keep going this way.
Posted Apr 20
There was already trouble on the horizon for the oil industry before the COVID-19 pandemic swept the globe due to the scrapping between the Saudi and Russian contingencies of OPEC, but on Monday afternoon the situation hit a new low, when literally the price per barrel of oil plunged below zero because companies have started paying people to take oil off their hands.
Since Houston is the oil capital of the world, we touched base with Ed Hirs, an energy economics expert with UH, to give us his take on what this all means:
Houstonia: So what just happened exactly?
Hirs: Essentially, there are a bunch of people who are currently obligated to take oil in May because they had contracts, and now they’ve realized they actually can’t take physical delivery of the oil they're supposed to take and are trying to sell these contracts out. So basically these companies are paying somebody, say $37.40 a barrel, to take it off their hands. They’re complaining that all of the storage is gone, which is not true, but all of the storage has been leased, so it’s a squeeze. Think of the movie, Trading Places, when the market drops out. This is just blistering.
Houstonia: Have we seen the worst of it though?
Hirs: Well, the contracts they're selling on don't close until tomorrow, so there's a chance that tomorrow will be even worse than today. And today is not like anything we've ever seen. This is the lowest the price has ever been since 1946. But really this is just a short-term aberration brought on by the fact that these people bought oil without considering they would have to actually take delivery of it. So now they're paying other people to do that. There are certain reasons to be worried, but the major companies are going to be fine—a lot of them have hedge contracts to protect them—and a lot of the independents will be okay as well, as far as this situation is concerned.
Houstonia: So will this hurt the Houston energy industry more than the previous low prices due to OPEC clashes and oversupply due to COVID-19 shutdowns?
Hirs: Well, it's like the Harris County District Attorney Johnny Holmes once said when someone was pointing out that a dead man had been shot 12 times—if you're shot 12 times or only once, there's not much of a difference. Either way, you're just as dead. Some people in the industry are going to have some really bad hangovers tomorrow, but overall at this point this situation has no additional impact on the market to the problems we've already been dealing with.