An oil rig stands at the end of a row of pump jacks shortly after sunset outside of Midland, Texas on Friday, April 24, 2020. (Eli Hartman/Odessa American via AP)
The last time crude was this cheap was in 1870 but for some storage operators, it's jackpot time, writes Ed Clowes
For hedge fund manager Joe Mares, the apocalyptic oil crash was historic in more ways than one. His family has worked in the oil industry for nearly 100 years.
Mares himself has spent his entire career investing in the energy markets.
But a lifetime of familiarity with the world's most important good was still no preparation for what happened on Monday last week. "I can't say I was smart enough to know it was going to go negative," Mares says. "But we knew it was going to go low."
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In the end, the May contract for West Texas Intermediate futures, considered the benchmark for US oil prices, made history by closing at -$37.63.
The oil market has never seen negative pricing."I have been involved in energy my whole career, and before that my dad and granddad worked in the industry," Mares says. "I try to take a long-term view, and I measure long-term in decades, not years."
Nothing in the history of the market has ever happened like this before. At the root of Monday's price crash was a head-on collision between the virtual world of financial speculators, and the physical world of heavy barrels of oil moving from place to place.
It was the culmination of a toxic few weeks in which values were first derailed by a price war between Russia and Saudi Arabia, then hammered again when the devastating economic extent of the global coronavirus shutdown became clear.
Frantic talks between Moscow and Riyadh eventually led to producers agreeing a huge output cut of 10 million barrels a day - but with demand down by as much as 25 million barrels, the reduction will barely touch the sides. The world will be awash with oil for months and storage space is fast running out.
So what clues does the past provide to fully understand this week's mind-bending market rout?
For most of the industry's history, returns from actually drilling oil were low. Value was created by owning the logistics and the refineries where oil is turned in to petrol or diesel - also known as the midstream.
"Oil is worthless if it can't be transported to a refinery and turned into gasoline or diesel," Mares says, adding: "If you control the infrastructure around an oilfield, you control the price."
Tycoons like John D Rockefeller understood this. He owned railroads and refineries and was by some counts the richest man to ever live.
Everything changed in the Seventies, a chaotic decade for the industry, after which it became more profitable to own the oilfields themselves. But we are returning to the old days, Mares says. "If you don't have infrastructure and downstream access, you can't guarantee a fair price for your oil, and whenever the market is oversupplied, your marginal price is zero."
That is the stark, arresting reality many traders and producers were confronted with last Monday.
For veteran industry watchers like John Hall, chairman of consultancy Alfa Energy, the day started much as any other would. But things quickly became surreal.
"It's never happened before," Hall says. "It's not a question of 'here we go again'. It's just not happened before," he adds in quiet disbelief. "It's completely unknown."
US oil is sent from around the country through giant pipelines to the sleepy town of Cushing, Oklahoma, where it must be collected by its owner. But financial traders who simply buy and sell oil contracts - which each entitle them to 1,000 barrels - aren't interested in ever taking ownership of that physical oil.They just want to sell the contract on to someone else for a profit. Failing that, they could store the oil in Cushing until the price increases again. But coronavirus has made that almost impossible. More than three billion people around the world are on lockdown, meaning that no one is using any oil.
Many traders are stashing away their barrels in the hope that lockdowns are lifted later this year, and prices begin to rise again, but space to put the black stuff is fast running out. "If you can find storage, you can make good money," says Reid I'Anson, economist for market-data firm Kpler Inc.
Because demand is so low and storage space is at such a premium, when the day of collection for barrels approached many speculators last week found that they could neither sell the contracts they were holding, nor find anywhere to hide the crude away. So as the rubber hit the road, there was a bloodbath. "It fell in minutes," says Hall. "From $18, down to sort to $1, down to close to $0 where it hovered around.
"And then suddenly, whoomph. The whole thing fell apart."
What the hell is going on?, Hall says he asked himself. Producers and traders globally were being forced to pay buyers to take oil away or store it, sending prices spiralling at a dizzying pace to as low as -US$40.32. Racing to find a solution, as the price crashed more sophisticated players opened their phone books and called every single person they thought might be able to help.
Barrels of oil were heaved on to railcars and sent to hubs such as New York and Houston, while all remaining space in the vast salt caverns of Sweden was snapped up in anticipation of a similar massive glut this side of the Atlantic.In the Channel, between Colchester and Rotterdam, dozens of oil tankers sit idly in the April sunshine. Each of these behemoths contains nearly two million barrels of crude.The number of tankers in the strait is "astonishing," says one shipping source.
The prices for storing oil at sea on such vessels have soared - on Wednesday Euronav, which owns a fleet of large crude carriers, said it was charging $250,000 (£202,000) a day.At the centre of this logistical maelstrom is Ben Luckock, head of oil trading for Trafigura, one of the world's biggest commodity firms.He was overseeing the company's operations on Monday during the crash."It was one of the most interesting days of my career," he says.
Trafigura acts as a middleman, connecting buyers and sellers, and finding a home to store oil for its clients - at the right price.
"It's been a grand logistics challenge," Luckock says, adding that many of his colleagues had worked through the night to find excess space and move oil away from landlocked parts of America. But even for seasoned traders such as Luckock, it was a shock when the US benchmark oil fell below zero.
"I've been doing this for 23 years, and I wasn't entirely aware we could trade negative," he says. "I was far from alone." Mr Luckock thought many in the industry had not understood how low oil prices could go, exacerbating the crash. Rumours are now swirling around the oil world. Among the traders' chatter, there is one persistent motif: Trafigura hit the jackpot as prices plummeted. "They've done a roaring trade this week," says one industry source.
Glencore, another one of the world's largest traders, is also said to be one of the winners from Monday's crash.But there is always another side to every trade, and there must be losers. Amid the chaos of this week's events, an empire was collapsing in Singapore.
As the oil markets went in to meltdown, a powerful and secretive oil trader named OK Lim decided to reveal his secret.
He had hidden more than $800m in losses over the past several years, and had made one final, epic bet in a desperate bid to come out on top.In January, Lim gambled that China would control its outbreak of coronavirus and Brent crude, the global benchmark, would rise.
But unfortunately for him Brent plunged from more than $70 a barrel in early January to less than $20 last week. The crash wiped Lim out, forcing him to confess to huge problems.Banks like HSBC are unlikely to recover much of the $4.05b that they have lent him over the years.
"It's absolute bedlam," says Chris Midgley, director of analytics at S&P Global Platts. "I hate to hear who's on the wrong side of this."
It is little surprise that a week of never-before-seen price movements has caused reverberations around the world. While the price of oil has since modestly recovered, it is still extremely depressed and experts are not expecting a rise any time soon. Countries such as Algeria and Iraq face a gaping chasm in their public finances as a result. Even wealthier oil producing nations, such as Saudi Arabia and the UAE, are being forced to urgently raise money.
Meanwhile, in the US, the very existence of the country's shale oil sector is under threat at current prices. A host of producers face bankruptcy, and thousands could be made redundant. Rocked by deafening calls from the public to act on climate change, oil majors like BP, ExxonMobil, and Chevron are already in a fight to survive.
For an industry that has changed only superficially in the past 150 years, many now believe that the transformation to cleaner energy promised by executives will be accelerated by this unprecedented destruction of demand.
Deutsche Bank strategists this week analysed oil prices going back to 1870 and found a barrel last week was cheaper at any time since then.
Given inflation has pushed up US prices by 2,870 per cent since then and the S&P 500 stock market index has generated returns of 31,746,505 per cent, this is an astonishing fall from grace.
"In nominal terms, it's not a surprise to see that, over the 150 years for which we have data, there's never been a negative price print before," say analysts Jim Reid and Nick Burns.
But with one eye on history, this comes as less of a surprise to hedge fund manager Joe Mares."Prices in the Twenties never went to zero as the producer would just literally just set fire to the oil rather than take a negative price, with terrible environmental consequences.
"The only difference between now and then," Mares says, "is that environmental regulation has improved."
The Daily Telegraph-Telegraph Media Group
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