A COMBINATION of factors led to the negative price recorded for US oil, according to a top analyst, who said it was not reflective of the industry worldwide.
Aberdeen-based Derek Leith, EY’s global lead for oil and gas tax, was speaking after West Texas Intermediate (WTI), the benchmark for American oil, slumped to as low as minus $37 a barrel on Monday.
He said the fall resulted from a combination of factors, intensified by the US share of a drop in global demand of up to 30% in this quarter alone, because of the global Covid-19 lockdown.
“The WTI price drop is not reflective of the oil and gas industry worldwide but is very specifically driven by the production and demand imbalance in the US,” said Leith.
“Most of the production is land-locked, and with storage facilities close to maximum capacity a further fall in the US benchmark crude, WTI, was inevitable.
“Yesterday’s headline-grabbing negative oil price of $40 bbl was driven by a relatively small number of May contracts held by financial traders having to be sold before they expired today, and the sellers finding there was absolutely no buyers.”
He said Opec+ had agreed cuts in supply which would shift things in the right direction when they come into force on May 1.
“In the medium term this action should be enough to rebalance the relationship between supply and demand as global demand will increase as the Covid-19 lockdown comes to an end,” he said. “However, we should expect a lot of volatility over the next couple of months and for crude prices to sit in the lower range as we experience a supply overhang of as much as 15 million barrels a day.”
Leith said the WTI prices would not directly impact the UK Continental Shelf (UKCS), but they were a “stark reminder” of the volatility of oil prices.
The price of the UK oil benchmark, Brent Crude, yesterday slipped below $20, its lowest level for 18 years. That came as WTI moved back into positive territory.
Deirdre Michie, chief executive of Oil and Gas UK (OGUK) said the global price collapse was a “body blow” for the North Sea industry, which would not escape unscathed.
“While we have anticipated continued pressures on oil markets, there’s no getting away from the fact that this situation is a body blow for an industry already creaking under the strains of the impact of Covid-19 and sustained low commodity prices,” said Michie.
“The dynamics of this US market are different from those directly driving UK produced Brent, but we will not escape the impact.
“Ours is not just a trading market; every penny lost spells more uncertainty over jobs, our contribution to public services and to the just transition we all want to see. OGUK will be pressing the case for a Covid-19 resilience package to governments in the coming days which will focus on protecting the supply chain, jobs and our ability to continue to reposition ourselves for the future.”
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