The price of oil could go negative - and it means some producers would actually pay people to take their oil
- The novel coronavirus has cratered global oil demand and ignited a price war between Saudi Arabia and Russia that has caused the price to collapse.
- The price of Brent crude, the global benchmark, has fallen about 60% since the start of the year to between $20 and $30 per barrel.
- While Brent is unlikely to go negative, other grades - especially in Canada - could see negative oil prices in May, the head of analysis at Rystad Energy said.
- That means that producers might actually pay people to take and store oil for them because it's more costly or difficult to turn off the tap.
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It's happened before.
The last time the price of oil crashed around 2015, some crude oil costs in Canada went negative, said David Doherty, an oil analyst at the research firm BloombergNEF.
And around the same time, a sour crude grade oil in North Dakota also dipped to -$0.50 per barrel, according to reporting by Bloomberg.
So what about now?
"I think we might see that happening going forward," Per Magnus Nysveen, the head of analysis at the research firm Rystad Energy, said. "In these special circumstances, we're close to negative already."
If prices do go negative, he said, some producers might actually pay people to take oil from them. You still wouldn't be able to fuel up your car for free, but the price of gasoline has also declined, and could fall even more if oil continues its tumble.
The price of oil could decline even more
The price of oil crashed in a matter of weeks, with Brent crude - the global benchmark - falling by about 60% to trade between $20 and $30 a barrel, relative to prices of upwards of $65 at the start of the year.
At the heart of the collapse, as you might imagine, is the coronavirus pandemic, which continues to wreak havoc across the globe.
It has cratered demand for oil. And after negotiations broke down between a group of oil-producing countries known as OPEC Plus and Russia, it also ignited a price war that has flooded supply.
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As much as the price has already collapsed, analysts like Nysveen say it's yet to bottom out.
"We will see a bottom of prices in May," he said.
The floor for Brent is about $15 a barrel, or about half of where it is today, Jason Gabelman, an analyst at Cowen, estimates.
But the price of lower-quality grades, such as those produced in Canada, will slip much lower.
In fact, the price of Western Canada Select, one of the continent's largest streams, fell to just over $5 last week, down from close to $40 at the start of the year.
What it would take for the price of oil to go negative.
Once oil is pumped out of the ground, it has to be stored and transported - which costs money. And those costs can be higher in regions like Canada that are farther away from major markets, Doherty said.
When the price of oil crashes, producers may lose money on the sale of oil, simply because they can't recoup production costs.
But in extreme cases, oil can be hard for them to sell at all.
With demand waning, oil reserves across the globe are starting to fill up, and storing oil can cost more than it's worth, so few people want to buy it.
In those cases, the price might go negative, at least at the company level, Nysveen said. That means it would actually be cheaper for producers to give oil away - or pay people to take it off their hands - than it would be to store it themselves.
"They will not be able to sell their oil because no one will take it," Nysveen said, in the event that the price of cheap grades continues to deteriorate. "Then they actually have to pay someone to take that oil."
"In Canada, we're not far from that now," he said.
Why don't producers just shut down the well until prices go back up? Nysveen said it's not that easy. In some cases, turning off the tap can "destroy" the resources, he said.
"It's not always possible to turn down oil production," he said.
If prices do go negative, they'll rebound quickly
The prices of Brent or the US benchmark, known as WTI, are not likely to go negative, Doherty said.
And even if some grades do dip into the red, they'll likely bounce back quickly, Ryan Todd, an analyst at Simmons Energy, said.
"That would be a very short-term kind of an issue because the market would start to respond aggressively," he said. "But it's certainly something which is feasible for a brief period of time."
That "aggressive" response would likely be a slowdown in production.
If the price of Brent crude falls below about $15 a barrel, companies will, in fact, produce less oil because they're losing so much money, Gabelman said.
In fact, according to the research firm IHS Markit, US producers could cut oil production by up to 4 million barrels a day over the next year and a half. That's about a third of the daily production in 2019.
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