“We’re in a deflationary moment that surpasses anything seen in most people’s lifetimes,” proclaimed a New York Times byline on Tuesday, the morning after oil prices went negative. The West Texas Crude Intermediate benchmark plummeted to previously unimaginable depths, closing the day at negative $37.63 per barrel. The novel coronavirus has wreaked unprecedented havoc on the global economy, shutting down entire industrial sectors and bringing countries across the world to a halt as the global community shelters in place to slow the spread of the COVID-19 pandemic. Economists have warned that the fallout is going to be the largest economic downturn that we have seen in our lifetimes, but few could have foreseen the absurdity of negative oil prices.
Few, but not none. Three weeks ago, on April 1, CNBC published a report titled “Oil prices could soon turn negative as the world runs out of places to store crude, analysts warn,“ which predicted exactly what is happening now. “Global oil storage could reach maximum capacity within weeks, energy analysts have told CNBC, as the coronavirus crisis dramatically reduces consumption and some of the world’s most powerful crude producers start to ramp up their output.”
While the situation is totally unprecedented it’s impossible to say what will happen next for oil markets, some experts think that oil is poised for a major comeback. Even though oil prices are lower than they have ever been, “one energy fund thinks $100 a barrel is achievable,” reported the Midland Reporter-Telegram earlier this week. At the time of the report, oil was only at an 18-year low rather than an all-time low. The article intro continued: “But first, prices need to fall even further.” Well, they got their wish.
As oil prices have tanked over the past two months, “Westbeck Capital Management’s Energy Opportunity Fund climbed 20.2 percent in March after declines in the first two months of the year, according to an investor letter. That puts the commodities-focused fund up 3.7 percent in the first quarter after U.S. oil futures cratered 66 percent — their worst quarter ever,” reports the Midland Reporter Telegram. “The fund, which gained 40 percent last year shorting U.S. shale companies, has turned its attention to oil tanks filling up at various points around the world, particularly at the biggest U.S. hub in Cushing, Oklahoma. With too much oil and not enough places to put it, Cushing may reach storage limits by mid-May, a market dislocation that could portend the next leg of a price rout.”
This all points to a huge comeback for oil prices. As the world rushes to scale back oil production, they are setting up a bull market for the future. “When we are on the other side of the pandemic, we think oil demand will normalize very quickly. And next year, we could even see unprecedented inventory draws and the world quickly running out of spare capacity,” Westbeck Chief Executive Officer Jean-Louis Le Mee told MRT in an interview.
“That rout will mean more U.S. shale producers will have to throttle back output, some of which could be permanent, […]. The shut-ins, coupled with a recent deal by OPEC and allied members to curb production, could set the stage for a price rebound in coming years.”
U.S. shale had already been in serious decline as West Texas wells aged and the gush of the shale revolution. Now, with the oil price crash, the Permian Basin has been burdened with bankruptcies and tens of thousands of fired and furloughed employees. So when we are able to return to business as usual, there will likely be a shortage of spare capacity. Low supply, high demand. That’s how these things work. Keep an eye out for $100 barrels coming down the pike.