When massive shocks to any market happens, it can seriously disturb or invert “normal” patterns of behavior. As it is being reported from Bloomberg by way of Yahoo! News, the oil industry is preparing to shut down amid the collapse in futures contracts that has left per-barrel oil prices at negative rates.
Negative oil prices, ships dawdling at sea with unwanted cargoes, and traders getting creative about where to stash oil. The next chapter in the oil crisis is now inevitable: great swathes of the petroleum industry are about to start shutting down.
The economic impact of the coronavirus has ripped through the oil industry in dramatic phases. First it destroyed demand as lockdowns shut factories and kept drivers at home. Then storage started filling up and traders resorted to ocean-going tankers to store crude in the hope of better prices ahead.
Now shipping prices are surging to stratospheric levels as the industry runs out of tankers — a sign of just how distorted the market has become.
The specter of production shut-downs — and the impact they will have on jobs, companies, their banks, and local economies — was one of the reasons that spurred world leaders to join forces to cut production in an orderly way. But as the scale of the crisis dwarfed their efforts, failing to stop prices diving below zero last week, shut-downs are now a reality. It’s the worst-case scenario for producers and refiners.
“We are moving into the end-game,” Torbjorn Tornqvist, head of commodity trading giant Gunvor Group Ltd., said in an interview. “Early-to-mid May could be the peak. We are weeks, not months, away from it.” (source)
This shutdown would not be a surprise. However, what happens when production has to “resume” as normal?
Enjoy the cheap oil pries right now, because when disruptions like this happen, they tend to cause two shocks- a massive rise then a drop, or in the case here, a massive drop before a rise.
Thus while one sees very cheap oil right now, in the future it should not be a surprise to think of possibly four, five, or maybe even six dollar gas once systems come back “online” after futures contracts return to stability.