Could oil prices go negative?
Even before the Wuhan pandemic hit, the major economies of Japan and Europe were experiencing negative interest rates. There are even hints that the U.S. might soon head in that direction. It seems like just yesterday that the thought of negative interest rates was inconceivable. But here we are.
Now another unfathomable occurrence is looming. With the Chinese coronavirus wrecking economies worldwide, there is talk in the oil industry of the possibility that oil prices could actually go negative — that is, oil-producers might be forced to pay their customers to take oil off their hands.
This phenomenon is basically supply and demand–driven. Economies are slowing down due to the Wuhan flu. This naturally cuts the demand for oil. Estimates are that the demand for crude is already down some 15 percent with further drops to come. At the same time, oil-producers keep producing. Worse yet, Russia and Saudi Arabia are in a vicious price war, driving prices down even farther. This is exactly why President Trump is personally trying to broker a truce between the Russians and the Saudis to cut oil production by 15 million barrels per day.
Right now, supply is exceeding demand. Governments and refiners are diverting excess oil to their storage facilities, but these are filling up fast. Soon no more storage space will be available. There seems little question that the world will enter into a Wuhan recession. Nobody knows, however, how long it could last. If it is a deep one, that is the case for negative oil prices. Indeed, Bloomberg reports that some producers are already paying their customers to take oil off their hands.
In a deep recession, oil production will have to start shutting down. The two main reasons why it hasn't happened already are first, that the impact of the Chinese coronavirus has developed surprisingly fast. It has caught the industry by surprise. Second, it is not a minor matter to shut down oil production. Plus, it is costly and time-consuming to restart it. If negative oil prices do become prevalent, that situation will exist for only a short time as the oil-producers curtail production to better match the demand and wait for an economic recovery.