For a short while last month, crude oil, lubricant of the world economy, was less than worthless: it had a negative price. WTI, America’s standard brand delivered at Cushing, Oklahoma, was so plentiful that sellers were offering up to 40 dollars per barrel to anyone willing to accept delivery. Refineries, the ultimate buyers of crude, had no interest, and storage facilities at the oil hub were exhausted. With oil nowhere to go, unfortunate sellers were outdoing each other to get rid of the stuff.
Markets turn negative when supplies are too plentiful. When solar and wind power produce excess electricity, utilities will bribe industries and private households to be more wasteful by paying them a small premium. When savings are plentiful and exceeding investment needs, as has happened for more than a decade now, our worthless bank deposits will be charged with negative interest rates to persuade us to consume more and save less.
Our savings, pension pots and corporate cash holdings have nowhere to go. Crude oil is no different. As the world economy shut down under the threat of a deadly disease, with factories idling and traffic slowed down to a trickle, buyers went amiss.
Refineries had a hard time finding takers of kerosene, diesel, maritime oil and petrol, as ships didn’t sail, cars didn’t drive and planes wouldn’t fly. For those of us who remember the debilitating economic effects of past oil price hikes, it feels odd. All of a sudden, black gold has turned to dirt.
The oil jam of Oklahoma also had technical reasons. Many buyers of US crude for delivery in May were neither a refinery nor experienced oil traders, but retail investors. Lured by rock-bottom prices they had bought into WTI-based Exchange Traded Funds, believing they were investing in physical crude oil reserves, like a gold fund, while actually investing merely in futures contracts. Such contracts are not designed for physical trade. They are typically sold and cancelled prior to delivery. This posed a problem when experienced buyers refused to step in.
Yet beyond Oklahoma, the rest of the world’s oil suffered an unprecedented price collapse too. Triggered by the violent Corona Recession, but amplified by an ill-timed marketing war between two of the world’s largest producers, Russia and Saudi Arabia, who in the face of US overproduction both refused to counteract rapidly shrinking demand. It took for an acting US president, worried more about his oil companies than the US consumer, to strong-arm the two into production cuts.
As Maltese we can’t even hope for cheaper gas or electricity, as our previous government made sure that we overpay for years to come
The skies of the most polluted mega-cities in the world have turned blue again. Armed conflicts, great consumers of fossil fuels, have been scaled down in many parts of the world as feuding parties respect the virus more than their opponent. Yet the risk for an all-out war in the Middle East has greatly increased.
The oil glut, which has now brought the entire US shale industry close to bankruptcy, makes war with Iran politically viable. A shrinking world economy with significantly reduced energy demands could digest even major supply disruptions in the Gulf region. US shale drillers would gain a new lease of life and Russia would be back in business.
The environment, relieved from emissions of fine particles, soot, nitrogen monoxide and CO2, is recovering at unprecedented speed and resembles in many parts of the world nature as our grandparents knew it. Yet in the long run the cheapness of oil is detrimental to a carbon-free future, as every other form of energy generation – wind, solar, nuclear, tidal or water power – looks unaffordable in comparison. It will become impossible to legislate or police even timidly agreed carbon reductions.
For a long time environmentalists had campaigned for the ‘divestment’ of Big Oil. The idea that oil producers, deprived of capital, would have to back down and give way to others who’d prefer to chop down the world’s forests for bio fuel was always ill-conceived, as every seller wishing to divest needs a buyer wishing to invest. Moreover, pension funds and retail investors, no matter how worried about the environment, were loath to let go of reliable dividend payers like Shell.
Now everything is different. With oil prices dwindling, shares of the likes of BP, Shell, Exxon Mobil, Chevron or Total are hammered. Not only upstream operations are threatened by ever larger losses, refineries too cannot sell enough refining products to operate profitably. With personal safety taking precedence over environmental concerns, only the producers of plastics can rejoice: everything we touch has to be disposable these days.
After almost half a century of ever rising dividends, Big Oil has done the unthinkable and began to cut payouts. Now even I have started to harbour doubts about the future of Big Oil, at least in my portfolio. One has to trust in a ‘V-shaped’ rebound – the belief that we will soon start off where we have left 12 weeks ago – to expect the earning capacity of oil companies to quickly recover.
The first safety valve of oil companies is to slash costs and to curb investments. Oil service companies like Baker Hughes, Schlumberger or Halliburton, tasked with identifying oil reservoirs and doing the actual exploring, drilling, engineering and maintaining of oil rigs, are at the receiving end of such cost-cutting measures. My shares in Petrofac, already tainted by corruption scandals, have lost more than 70 per cent by now. National oil companies like Petrobras of Brazil, or Pemex of Mexico, having been bled for years by a succession of incompetent and covetous governments, whose bills they picked up at the expense of future investments, are now turning from cash cow to millstone around their countries’ necks.
The winners of ever cheaper oil are neither idling industries nor we, the consumers, as we don’t drive and don’t travel that much these days. As Maltese we can’t even hope for cheaper gas or electricity, as our previous government made sure that we overpay for years to come. Today’s winners are traders who contracted storage capacity in time to fleece the headless and the owners of tanker fleets, whose vessels are turned into floating storages for $200,000 a day.
Most oil majors have a cash flow strong enough to dodge the Corona Recession, of course. But those juicy dividends of the past may not return for a long while.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com
Andreas Weitzer, independent journalist based in Malta