Oil prices (CL=F) have plummeted as a global supply glut is facing a global economy that has come to a stand-still amid the coronavirus pandemic.
The disconnect between supply and demand is so bad that some producers are paying customers to take some of the oil away. How could that be?
“The cost to store the crude oil is now higher than the price they can get for it,” explained Bob Iaccino, Path Trading Partners Co-Founder & Chief Market Strategist. In an interview with Yahoo Finance’s On The Move, Iaccino noted that this is a problem faced by landlocked oil producers. “You can't flow away stored crude oil.”
Goldman Sachs commodities analyst Jeff Currie discussed the phenomenon in a note to client on Monday.
“High-cost waterborne crude oil that can reach a ship (storage we have historically never ran out of), are better positioned than landlocked pipeline crude oil sitting behind thousands of miles of pipe, like the crude oils in the US, Russia and Canada,” Currie said, adding that drillers in Texas and parts of Canada could see prices “go negative.”
Transportation, shipping, storage, refining and distribution all must be factored into pricing, making onshore, landlocked production economically untenable.
And what of the excess supply? According to Iaccino it will be disposed of “logistically, technically.”
Yvette Killian is a producer for Yahoo Finance’s On The Move.