As the coronavirus pandemic continues to paralyze business operations that require the government to implement draconian measures as the world grapple to flatten the curve, there is one industry that will soon reach “negative territory.” Analysts projects that the supply freeze on oil and energy products will eventually lead to oil prices below zero.
The main reason behind that, analysts posit, is that oil storage facilities will soon be overwhelmed by surplus supplies. This means that there will be too much oil stored in warehouses and other plants that they will no longer be able to save them – both onshore and offshore.
The situation will get worse as the three-year agreement between OPEC and its allies, which aims to control oil prices by cutting down production ended on Wednesday, causing bigger productions.
A price war on oil is recently fought between Saudi Arabia and Russia after the latter rejected the proposal during the OPEC+ emergency meeting last month to cut an additional 1.5 million barrels per day in oil production.
As a response to Russia’s rejection of the OPEC+ proposal, Saudi Arabia said that it would cut oil prices further and increase production by 12.3 million barrels per day when the current production cuts expire at the end of March.
“Refineries in many places are now losing money for every barrel they process, or they have no place to store their output of oil products,” Bjarne Schieldrop, chief commodities analyst at SEB, as reported by CNBC.
“For land-based or land-locked oil producers, this means only one thing,” Schieldrop continued. “The local oil price or the well-head price they receive very quickly goes to zero or even negative because if they have too much oil, they must pay someone to transport it away until they have managed to shut down their production.”