Crude’s ‘Black Monday’ is likely to be a one-off in oil history

April 20, 2020 will go down as the blackest day in a very dark month for the oil industry. The price of West Texas Intermediate (WTI), the American benchmark, plunged into negative territory, hitting minus $40 a barrel at one stage, as traders scrambled to offload barrels that nobody wanted and which could find no physical home as the US storage system rapidly backed up.

It was probably the single worst day in the history of oil, and its consequences are still being felt. US shale companies are dismantling rigs, shutting in wells and — in some cases — going bankrupt at a faster rate than ever before.

Brent, the global benchmark under which some Saudi Arabian oil is traded, also felt the effects. The price fell to just above $20 a barrel that day, and while it has recovered to more than $32 currently, the repercussions of “Black Monday” have forced producers in the Gulf and elsewhere to order cuts in production inconceivable before that day.

Now oil traders are asking: Could it happen again in May? The crude industry is just a few trading sessions away from the expiry of the June delivery contract, when deals to buy crude have to be either satisfied by taking physical delivery, or rolled over into the next trading month — exactly the situation which caused the problem in April.

On balance, the fundamentals have improved slightly, reflected in the price of WTI as it approaches $30 a barrel again. That is still half of what it was at the beginning of the year.

The big problem continues to be demand. At the peak of the coronavirus disease (COVID-19) pandemic lockdowns last month, demand for crude dropped by as much as 30 percent. The International Energy Agency said last week that demand would slide by a further 8.6 million barrels per day (bpd) this year, or roughly 10 percent of pre-pandemic levels.

There are all sorts of assumptions in that figure, notably that there is a significant recovery as economies reopen quickly and there is no serious second wave of COVID-19 infections to send the world into lockdown again.

But it is an encouraging projection, especially set against the big cuts that producers have ordered since the crash. The OPEC+ alliance led by Saudi Arabia and Russia pledged to cut a huge 9.7 million barrels after Black Monday, and the Kingdom and other Gulf producers have since announced big extra voluntary cuts.

Saudi Arabia on its own has taken something like 4.5 million bpd out of the market in a month, reasserting its status as the global “swing producer” that determines market conditions.

Meanwhile, US producers endure a less voluntary form of output reduction as they contract or go bust.

There have been several cautiously optimistic assessments from global energy leaders — notably the energy ministers of Saudi Arabia and Russia last week — that a rebalancing of supply and demand in crude is underway and will improve.

Other industry dynamics are also looking better. One of the big fears back in April, which directly impacted the WTI price, was that the US was running out of storage for the oil that nobody was using in cars, planes, or manufacturing. The giant storage facilities at Cushing, in Oklahoma, were said to be nearing “tank top” — full to the brim.

Several industry experts have said recently, however, that there is still significant storage capacity in the US as President Donald Trump’s administration rushes to open new storage facilities in the fast-changing market.

Saudi Arabia on its own has taken something like 4.5 million bpd out of the market in a month, reasserting its status as the global ‘swing producer’  that determines market conditions.

Frank Kane

For all these reasons, a repeat of the April carnage is possible, but not probable.

One final factor is that this time the markets and regulators are forewarned. Speculators who got their fingers burned last month are not likely to be as reckless in their bets this time.

Just last week the main US oil market, the Chicago Mercantile Exchange, received a stern warning from its federal regulator that it would not tolerate another chaotic end of contract next week.

Nobody wants a repeat of Black Monday, which is likely to stand forever as a unique and historic phenomenon in crude history.

• Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai