The Day Oil Went Subzero
It was an oil Everest, but in reverse.
That’s how Rystad Energy’s head of oil markets, Bjornar Tonhaugen, described seeing oil prices turning negative in a reflective statement sent to Rigzone, which marked the first-year anniversary of the moment prices in the industry went subzero for the first time ever.
“It’s not that frequent that an oil markets professional has to deal with unprecedented events in the oil market anymore,” Tonhaugen said in the statement.
“Downturns come and go and that feeling of business as usual had made the market overconfident over handling a crisis. Last year proved that we hadn’t seen it all in the oil world, many failed to see the gravity of what was coming, including oil producers, OPEC+, governments and analysts,” he added.
“Seeing prices turning negative, although it was the result of a storage risk that we at Rystad Energy had been highlighting for a while, meant the discovery of a new market condition … Oil prices not only hit rock bottom, but they also broke the rock,” Tonhaugen continued.
April 2020 was no usual month at Rystad, Tonhaugen noted, adding that all the departments of the company were on high alert over the rapidly changing market.
“It was a month when we, like many other energy-focused consultancies tried to navigate the consequences of the Covid-19 pandemic into the business,” he said.
“In oil markets in particular, developments are so quick, that an 8-hour working day did not apply to us for a number of weeks. Especially on the day when oil prices went negative, everyone was on high alert. Even people who were back home from work tuned in to see just when and where the price dip would end,” he added.
“No one wanted to miss that and we formed an internal forum, where analysts, management, consultants and our media relations conferred on what to communicate to the world,” Tonhaugen revealed.
The Rystad representative highlighted that the negative prices were a result of the market itself postponing an action plan, thinking that the problem would go away on its own.
“Producers did not want to halt production, hoping that the low prices wouldn’t last long, therefore coping with a minor loss. OPEC+ on the other hand could not immediately agree on policy due to different interests. Meanwhile, oil storage was filling up quickly, forcing oil tankers to become floating storage,” Tonhaugen said.
“When that bubble was about to break panic took over and traders who couldn’t take on and store any more product they wouldn’t be able to sell tried to offload their excess commitments, but nobody wanted to buy,” he added.
Analyzing whether the market could see negative prices again, Tonhaugen said it was difficult to imagine that there are high chances of seeing such oil price developments once more.
“Negative prices, especially of that gravity, were a result of the market not being experienced and prepared for what was coming,” he said.
“Most of us will remember 2020 as the year oil became a burden, rather than a money-maker, a year that is very difficult to repeat. A pandemic is not something frequent, and although it doesn’t usually happen more than once per generation or less, it could come again,” he added.
“If the world’s oil demand goes to the red again, now oil producers, OPEC and governments have the experience to deal with it, thus another round of negative prices is unlikely,” Tonhaugen continued.
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