On the 20th April 2020, history was made as WTI crude futures contracts dropped below $0, with the BBC reporting, ‘the price of a barrel of West Texas Intermediate (WTI), the benchmark for US oil, fell as low as minus $37.63 a barrel’. The next day, Brent Crude, the benchmark used by the rest of the world, fell to less than $26 a barrel. Why did we see this drastic drop in oil price and what are the long-term effects?
The ultimate cause of the fall in oil price was supply and demand. Since COVID-19 appeared in China at the end of 2019, the price of oil has been steadily falling. As the virus spreads, so to do measures to contain it. This has caused the eventual shut down of many industries, significantly manufacturing and travel, major players in oil usage. This led to the largest decrease in demand for up to 25 years. As usage decreased, crude oil production continued, not slowing enough and inevitably leading to a huge disparity between supply and demand.
Oversupply isn’t always a problem, as long as there somewhere to store the oil in the interim. However, due to the US’s recent levels of production, around 90 million barrels per day (bpd) as of April, storage was already running low, with potentially up to 100 million barrels in floating storage before the oil price drop. An article published before oil prices hit minus figures stated that, ‘global oil storage capacity has an upper usability limit of 1.2 billion barrels, according to IHS Markit data cited by Forbes’ Sharma. In order to avoid filling tanks and tankers to the brim, […] the cut would need to be about 10 million bpd’. Since then, on 12th April, the Organisation of the Petroleum Exporting Countries, as well as Saudi Arabia and Russian (OPEC+), announced an unprecedented deal to cut oil production by 9.7 million bpd. These cuts, which began on 1st May, are due to take place throughout May and June, with potential further cuts following in the third quarter.
This proactive step, coupled with lockdown starting to lift, seems to already be having positive effects. On Monday 18th May, almost one month after the historic price crash, WTI for June delivery increased around 8% in one day, bringing the price per barrel to $31.82. This is an increase of more than 200% on the prices seen in April.
There is also potential for the tables to turn entirely as demand meets production and then surpasses it, causing an imbalance opposite to the one we have just seen. One where demand is greater than supply.
Investment in existing oil wells has decreased in the last decade and is currently diminishing due to reduced production. There is no need to maintain wells that aren’t running, particularly where companies are looking to reduce costs. However, Cyril Widdershoven of Oil Price states, ‘analysts should realize that zero investments in existing production could threaten a production decline of 6-12 percent per year’. Although there are thousands of oil fields around the world, only around 25 of them account for one-quarter of the global oil production. If these fields aren’t maintained, they become decreasingly productive while demand increases, leading to higher oil prices. This problem is exacerbated as many of these wells are old, with dwindling supplies to draw from. Smaller new wells can take around 9 months to begin production, and new projects were the first to be put on hold when COVID-19 hit. This means new wells aren’t a quick fall back should demand near normal levels this year.
As oil production has decreased, so too has gas flaring. Flaring is more common in newer wells, where infrastructure is still settling. Due to the slowdown in production, and a lack of investment into new well heads, flaring figures are decreasing. In the Permian Basin, an area known for its significant flaring figures, flaring dropped to the lowest levels since 2018, dropping from 900 million cubic feet per day (cf/d) at the end of 2019, to 700 million cf/d during the first quarter of 2020. However, if we do see more new wells popping up to meet demand, then these figures could reach and even surpass previous levels of flaring.
Flaring regulations in the Permian Basin are frequently a topic for discussion. The practice is regulated by the Railroad Commission of Texas, who require all operators to report volumes of gas flared in monthly reports. The most accurate way to measure flare gas is with ultrasonic technology. Fluenta’s FGM 160 Flare Gas Meter uses ultrasonic technology to effectively provide measurement data, allowing oil and gas companies to ensure flaring is performed efficiently and they adhere to regulation.
For more information on Fluenta’s FGM 160 Flare Gas Meter, click here.
