Oil at Minus US$100 “Not Impossible” as Global Storage Tanks Become Full

RIO DE JANEIRO, BRAZIL – In orbit hundreds of miles above the Earth, the Sentinel-1 satellites are the eyes in the sky that show why US oil prices dropped below zero and why much of the world may go the same way.

The satellite receives radar signals from the huge metal tanks that store oil, and these data are used to calculate the amount of crude oil stored. The message coming back is alarming: oil storage capacity is almost exhausted.

This is something new, and the market is just beginning to assess what it means. Experts say that the room to store oil may run out in a matter of weeks. As a result, the price of oil could drop to near zero in many parts of the world, and in some cases prices could turn negative.

Florian Thaler of Oilx, a research company that uses satellite data, says global tank storage capacity could be depleted “by late May or early June”.

The chaos in the US oil market on Monday could provide clues to the global scenario if other tanks begin to fill. It also shows the market will likely anticipate peak storage, rather than wait to plunge when the limit is breached. Some oil producers have now re-drafted their contracts to stop their prices from going negative.

On Tuesday, the selling frenzy continued. Brent futures for June delivery lost 15 percent to trade close to US$16 a barrel, the lowest in almost 21 years. Key European and African crude streams, which trade at a discount to the Brent benchmark, will sell under US$10 and even below US$5 in some cases.

“We have clearly gone to a full-scale, day-to-day market management crisis,” said Paul Sankey, a veteran oil analyst at Mizuho Bank who correctly cautioned of negative crude prices in March. He went a step further on Tuesday, saying: “Will we hit negative US$100 a barrel next month? Quite possibly.”

The world of negative prices has no floor, and after this week, anything is possible. One certainty is that the latest satellite data shows a massive glut. There are 50 million barrels of crude going into storage every week, enough to fuel Germany, France, Italy, Spain, and the U.K. together.

In India, refiners have filled 95 percent of their fuel storage capacity, according to officials at three state-owned processors. Nigeria will cut production because it has no place to store crude, Mele Kyari, the chief of state oil company NNPC told a local newspaper.

Oil refineries have not been buying crude because there is no demand for gasoline. Some producers have reduced production, but others continue to pump. Even a few dollars are better than none for indebted companies. Oil has nowhere to go except into storage.

Satellite data may even be underestimating how much storage is actually available, because a lot of empty space has already been rented by traders.

Source: Bloomberg