Why did u. S. Oil prices hit negative territory an unprecedented fall in American Crude Oil sales has added to the hardships caused by coronavirus so what will that mean for the u. S. And the Global Economy this is inside story. Hello and welcome to the program im Richelle Carey thats one of the worlds most valued commodities but the coronavirus lockdowns to overturn the dominance of oil worth of a barrel of u. S. Oil fell to less than nothing on monday thats the 1st time in history the price has turned negative so this means producers ended up paying buyers more than 30. 00 a barrel to get oil off their hands it rebound a slightly shit disturber 2 dollars the next day that jaw dropping slide this because the world has more crude that it could use and Storage Facilities and even ocean tankers are filling up oil is traded on future contracts and fears of not finding a place to put oil in may means nobody wants crude thats led to a severe drop for west texas intermediate a benchmark for u. S. Oil that are National Benchmark for oil brant crude also went down to its lowest in 18 years so lets have a look at how events reached this point the demand for oil has dropped by 30 percent since travel restrictions were imposed back 3 shot and people stayed home to stop the spread of covert 19 while producing nations mainly saudi arabia and russia kept pumping throughout march and into this month theyve sense agreed to cut production by almost 10000000. 00 barrels but that was still less than the decline in consumption Saudi Oil Tankers heading to the u. S. Threaten to worsen over supply problems for american producers donald trump says his administration will look at blocking them. Downplayed the a store drop in oil prices as a short term problem and said the u. S. Could buy barrels to top at the Nations Strategic Petroleum reserves much of it has to do with short sellers bunch of it has to do if you look a month into the future i think its a 25. 00 or 28. 00 a barrel so a lot of people got caught they got caught and there are a lot of people that are not too happy because they got caught so if you take a look at it youll see its more of a financial thing than an Oil Situation but because you take i believe in a month or so until its go a little bit out its a 25. 00 and 28. 00 a barrel so its largely a financial squeeze and they did get squeezed this is a great time to buy oil and wed like to have congress approve it so that we could instead of just storing it for the big usually the Big Companies because i think we have 75000000000 gallons right now capacity thats a lot its weve been building it up over a period of time but thats a lot 75000000000 barrels. So were going to get either ask for permission to buy it or well store it one way or the other it will be full. Sort of our gas from histon bob captain our hes an oil and Energy Industry expert from berne Cornelia Meyer c. E. O. Of myer resource you say oil and gas expert and from bangkok steven innes chief Global Market strategist at acts of core pay Global InstitutionalFinancial Services company thank you all for joining me so since this has happened this this drop the word catastrophic among other words has been used bob is that appropriate is it that bad. Well it when you think about their markets at least the way we look at it here is that theres a Financial Market then theres the physical market the physical martin market is certainly in a terrible shape just because were down 3035000000 barrels a day and demand on the financial side the catastrophe yesterday was people trying to roll out of their make contracts and there were a lot of contracts that were long a lot of holders of long contracts who couldnt unload them and finally the price went negative as people were trying to settle those contracts thanks for making that very clear for a lot of western dont speak oil that was actually extremely clear thank you for that cornelia how would you describe it i would actually i would concur with. The previous guest and i would say one thing that we have to look at the situation is very dire because we have the havent we have a the mando behind of anywhere between 30 and 35000000 barrels a day but we what we have to put to do to put this into perspective is that w t r i am is the u. S. Benchmark and its priced at cushing and storage just running out or run out i just spoken for in closing its a little bit different that explains the differential between brant and w. T. R. For brant which is sort of a c. Boyden little benchmark and therefore its also it up in terrible shape but its not all negative because it has places to go ok stephen before i come to you sense cornelia brought up a west texas intermediate im obviously going to go back to bob in houston bob what is the difference in storage when it comes to dead e. T. I. And brant crude well as can you use a bridge tends to be a more global price and the lot of bread is on the water going from 1. 00 country to primarily the middle east and other countries to their it through their export markets. In the states were producing well we were producing about 10000000 barrels a day and it was demand being destroyed here in the states and the export market for us that weve been storing up storage in storage is just about for both a new u. S. P. R. Which is the Strategic Petroleum reserve for the government and for private commercial storage so thats caused a lot of the world to shut in we believe right now over a 1000000 barrels a day of production have been shut in already and i would expect another 1000000 or 2 to shut in because storage is good at becoming for a state cornell yes i see you want to do it on that im coming stephen i promise i would totally agree alex i would say its 3 to 3500000 and that will be shouting and we have to look at the broader ramifications big when you look a lot of these Companies Start out well so theyre studying the law are smaller so quick you so step have a higher cost base im highly levered have a high leverage so this will have the Ripple Effect into the banks that lend to them because if they go bankrupt their loan portfolios deteriorate so stephen. And i have explained you know what west texas intermediate as opposed to brant crude oil but it is brant is it isnt going to be in as bad a shape is. Well its quite pretty interesting it seems that not only her tankers reaching saturation a lot of oil traders are also very bizarre markets are going through right now i think we have to take some value as to what happened the settlement date i think its easy to discount it because we had a massive u. S. E. T. F. Fund that had to roll a substantial amount of positioning its kind of under question right now what is it going to do actually could you explain that just a little simpler for for our audience if you dont mind well she sure sure sure right now what we have is we have a large retail propensity or a large retail. Investment into an e. T. F. Fund or right now thats grown quite substantially throughout 2020 this is despite the fact that oil prices have been coming down so in other words investors to be trying to pick bottoms here now theyre running around 11000000000. 00 worth of u. S. Dollars and long oil positions and this is really the bulk of the deputy high position that all came to market all of a sudden and obviously and he had fun cant take delivery so they had to roll a position and thats caused a lot of negative action on the short month which was may however Going Forward we have to figure out what this is going to mean for brand now is it going to have a knock on effect when the gas of correctly alluded to the fact that yeah weve got a seaboard market but you know storage tanks are filling filling up everywhere and this is a problem but were going to have a similar event is going to happen and. Perhaps we could and i think this is why youre seeing the market starts of paid for it in other words roll those contracts more proactively ahead of the settlement dates and this is why oil is going to remain under pressure most likely notwithstanding the fact we could see the u. S. O. Which is the large e. T. F. And start to liquidate those oil positions which will also compound Oil Market Problems going for. But in some ways i mean what were what were going through now is obviously not predictable per se but in some ways was it predictable that that this would happen once a con a maze started to shut down and from that made sense the next country in the next country in the next country was that predictable that that Something Like this would happen when there is no demand its been a real concern for quite some period of time the problem that weve had especially within the independent markets here in the states is that weve continued to return negative equity returns to investors and so the investors have fled the space the flood of spaces as long as 2 years ago and Equity Financing has become more and more difficult and is create cornea mitch and so connected as i saw the other side im trying to say i want to keep it as simple as possible so youre saying that in a lot of ways the industry was always already in trouble before Something Like this happened we tend to do this to ourselves when we are over and over whatever we drill we develop new technologies that allow us to drill wells at lower cost which increases production effect increase production so much we change the laws in the states a few years ago to allow u. S. Companies to export u. S. Produced crude which was against the law up until about 2 or 3 years ago and so so now we have we develop our own export market producing more and more crude importing less from the middle east in canada and other places but weve continued to increase supply even as conservation and slowdowns in the economy that in 20092015 have. Slowed the growth the demand itself and so weve created this problem over a period of time and now were to the point where were over levered overproduced and and now with these low prices and some serious crisis just an anecdote i was talking to one of my. Engineer friends yesterday and hes an advisor to banks and he has 15 companies with banks right now that are in the. Process restructuring and thats just the beginning thats a lot cornelia i saw you nodding you have some some thoughts on what bob is saying about how in some ways the industry sometimes does it to itself i know we are classic boom to bust to boom industry. If we do that all the time but i think theres one other thing that i would like to mention and you saw that with the increased output out of the u. S. You know the u. S. Became about about a year ago the largest producer surpassing solidly and russia as i would 2 largest producers who are still the largest exploiters and we stack you had this formation of opec plus opec and their friends sort of balanced them like its always taking the pain always taking crude out of the market when there was too much crude on the market but what happened last march is russia would not play ball and saudi arabia said well if youre not playing ball were not taking all the older pain so there was a price war happening so on top after the lunch shock that we saw we saw a supply shock of of of of to do to largest export this just you know producing whatever it it could be so so so so we do it to ourselves and our behavior does not always help stephen what of that this price war that was going on between russia in the kingdom a kingdom of saudi arabia you know nothing happens in a vacuum this is been happening against the backdrop of whats happening with coronavirus what role do they play in the industry out of this. Well you know its interesting because it was always an issue as far as russia was concerned about a piece of the pie theyve always applied some type of pressure going into virtually every opec meeting by sort of well were not going to comply unless you get his bigger piece of the pie has been a running debate however i think they were a little bit sideswiped when this trade when the surprise were happen simply because covert hadnt exploded look at that time it was just going to be a temporary face and everything was going to return to normal then you know a week after they started the price war then explosion super spreader happened in italy and lights went off everywhere and everything went into the doom and gloom cycle and this is really what happened. Whos responsible well i think the only way youre going to be able to dig out of this mess quite frankly is its totally unexpected nobodys fault its just the viruses affected the world can have to be coordinated interventions not only by opec but also opec and friends but also g 20 presume he says and this is going to be necessary now legalities dictate that g 20 and freo create open economies you cant really regulate people to the shop wells down but theres going to be to one side theres going to be voluntary shut ins or simply organic shutdowns are going to happen because prices are too low defectively bring oil out of the ground at these prices in a profitable basis so one way or another the markets going to rebalance when thats going to happen well probably when the economy start opening up but even then im a little bit suspect because i dont think people are going to need italy jump in the planes i dont think theyre going to jump into trains or driving cars so my view is here theres going to have to be a cure and thats probably going to be the ultimate. You know cure all for all devastation older men devastation right now heard heard of unity to cure or if theyre there but there are a few to care therapeutic means to to eliminate this virus so bob it seems like stephen is saying that this isnt going to go any go away anytime soon theres a 35000000 barrel a day glut how do you get out of that what do you do with it. Well stephen is exactly correct you really cant regulate countries in terms of output and in the states the president cant till. The producers directly to shut in states can texas in fact used to have what we call proration were each well that was produced in texas actually received a monthly allowable from the state Railroad Commission the Railroad Commission regulates all the gas which is kind of a weird thing for texas young texas has these strange names for things like the exemption. Theyre regulated will i guess but there but theres a lot of talk in the industry right now about starting peroration up again by the state economics do work though wells are shut in right now just because of economics and i think to a lot more several more 1000000 barrels are probably going to be shut in in the states alone what about what President Trump was saying about buying more for the strategic stockpile how does that work. Thats a bandaid its just a bandaid its its you know the the Strategic Reserve is like i think 70775000000 barrels a like that and its like 2 thirds 3 quarters for now so its just a short Term Solution that doesnt fix the glut problem the got the globe Problem Solved by shutting in reducing supply or conquering the virus in starting to use hydrocarbons again until then the globe is going to continue. I want to go back to something that stephen mentioned and bob touched on it as well this concept i mean if there wasnt a lot of global coordination in dealing with this chronic virus unfortunately well at this point what we tried what was tried was this 9700000 barrels a day from opec last being taken out with a not a 50 a but up to 15000000 barrel with the cheap 20 countries to last only by natural attrition because they could produce less but thats not enough if you look at the eye which says its the demand destruction for april alone use 2829000000. 00 barrels a day so we will there will be sharpens there will be sharp things but what i would like to point out which i think is important yes it will get better n. T. I. A. The International Energy agency says by the 2nd half we will have a demand overhang because so much will be shut in by then in bed even if we get there the world will not we were to usual it will take time until people travel and the other thing is supply chain start we will to the supply chains will have to realign we will see regionalize ation of some of the supply chains and that means less transport that means less oil demand so to shape the oil demand and where its coming from will probably have changed in the post cove it 19 world stephen what does this mean for the shale industry which i mean the sale of history already wasnt doing well what does this mean for the shale industry. And i mean so pretty pretty negative really when you think about it the prices remain had to press for a long time just based on what it cost to print shell out of the ground relative to the lower producers like a saudi arabia russia. And even there the breakeven is or were getting pretty close to those levels right now at a w. T. R. Base level so its pretty shocking really i dont know how things are going to survive keep taxes were already good the reduced. You know basically everybody has a price taker right now as far as oil looking at any city thats a price taker separately just not shale industry this is a global problem theres a lot of countries there you look at k. L. In my region koku alone pours a big price taker singapores a big price taker calgary houston these are all big price takers going to see a lot of pay and a lot of support industries not just necessarily the people who pull it out of the ground but a lot of industries that go to support this industry its going to be a lot of pain throughout the market suspects in unemployment there that that is the employment area i want to bring bob into that conversation that was actually my very next point is what is this i believe talk to a lot of business and a business is significant obviously what does this mean for the average person that as a worker and the oil and gas the Energy Industry what does this mean for them. Well heres to becoming a layoff city you know were one of our Largest Industries in houston the universe for us production and here theres hundreds of thousands of jobs that are tied to either directly producing crude or the ancillary services around it so the companies are already walking thousands of employees now unemployment claims in texas are through the roof. All the companies now except for a few Operations Centers are operating remotely and a lot of companies a lot of companies have just shut down weve lost quite a few rigs that have been just laid down drilling stops all those drilling crews are now laid off production crews pumpers engineers they go it goes for the whole gamut from executive down to the back office folks this is a this is a catastrophic price drop its going to take and the thing about about these kinds of cycles normally it takes about a year and a half 2 years to come back from one of these down cycles 2001200920 extension 15 this because youve got the drop in demand that may never come back in terms of coming back to the 9095000000 barrels a day Global Demand this is disk could be a permanent just step down in demand and employment that has resulted results from that lower demand which goes to a criminal use point that when this is all over things well will definitely not be the same did you want it do you want to add to that cornelia yes i wanted to add to that you know you mentioned cap ex and thats very important when you see how cap ex has also come down by the i. O. C. So all of the International Economists have announced cap ex scotts and something ive seen for the 1st time usually when you had a downturn io ceased International Oil companies to some independents what would would would would would trip would what would limit their Capital Expenditure at this time for the 1st time i see the national Oil Companies in the gulf in the t. C. C. The out on course the at no. So if this world also curbing the the production that actually can be quite bad because oil is not like a light switch it takes in the shale space 18 months from an investment to production offshore it can take 10 years from investment to production so when the mild comes back we may have shot in so much and it may really be difficult to to ramp production up again quickly enough because just so much a shop in stephen is as you all of have all agreed to in a lot of ways the industry tends to do these types of things to themselves is this any type of wake up call for any type of lesson Going Forward for maybe how the Industry Needs to change or evolve or does this create room for a different type of energy thank you very seen the switch in the big oil already moving to more green energy and i think. You know just looking at some of the you know the progress thats been made in the green energy this is obviously a threat to the Oil Producers also but you know the big big big oil is moving in that direction i think thats that it changes the foot rate now going to be moved to where he has jihad and thats the way things are going thats the way the public wants it to go the agree with that. Well absolutely the only way the only Gas Companies are going to survive long term is to adapt to the one thing about the oil and gas Business People need to understand if you dont like fuel and gas business that is doing right now just wait about 5 minutes they have to change in order in order to keep up and here youre seeing it already stephens right you are seeing Larger Companies begin to move to more rules sustainable kinds of Energy Sources to to adapt to the to the reduction in in in crude demand its sort of like when the light bulb was invented the Candle Companies were doing all that well so they either went out of business or they adapted to light bulbs is going to be a similar change long term for the Energy Structure face really get the final word do you agree that this might be a little bit of an opening for for a necessary change. I think it might be on one hand yes it might be on the other hand because if you look at especially the International Oil companies yes theyre moving aggressively into the green space but as theyre cutting capeks they may you know its still north core so well have to see how this history this shakes up and also in terms of governance you know want to do more green things greener logically better and the cheaper the option well you know we may be so cash strapped when we come out of this crisis that the money for those investments is not there so yes i mean ideally it would be as the 2 gentleman mentioned im not sure we are living in a in an ideal world thats probably the best place to think we are either but well see and thank you all for the conversation appreciate it very much bob cavanagh or Cornelia Meyer and stephen s. 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