Trump pledges lifeline to US oil industry as prices fall below zero
Donald Trump has promised to offer a financial lifeline to the US oil industry after prices turned negative for the first time ever.
The US president said he had instructed the treasury to help develop a funding plan for embattled oil producers, some of which were forced to pay buyers to take their oil earlier this week as market prices plunged to minus $40 a barrel.
Trump revealed plans for the rescue deal hours after the US oil price fell back below zero on Tuesday morning, following a brief overnight recovery from the historic fall into negative prices late on Monday.
“We will never let the great US oil and gas industry down,” Trump said on Twitter.
“I have instructed the secretary of energy and secretary of the treasury to formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future,” he said.
The West Texas Intermediate (WTI), the benchmark for US crude prices, turned negative for the first time in market history on Monday, plummeting $40 a barrel below zero, and slumped back into negative territory as trading began in Europe on Tuesday after a brief overnight recovery.
Negative prices indicate that producers are resorting to paying customers to take the oil off their hands because the US is running out of space to store a glut of crude caused by the global coronavirus lockdown, which has prompted a collapse in demand.
One of the US’s biggest oil storage facilities – at Cushing in Oklahoma – is likely to run out of space within the next three weeks. One of the world’s largest independent oil storage operators, Vopak, warned that other big oil stores outside Rotterdam, Fujairah and Singapore were all but full too.
The US market collapse marks the first time that the price of an important oil benchmark figure has tumbled below zero, and underlines the severity of the crisis facing producers in the months ahead.
Trump played down Monday’s collapse into negative prices as a shortterm development, in which people “got caught” by a “financial squeeze”.
The negative US prices were for oil to be delivered in May, when demand for crude is forecast to fall to its lowest point, but before production cuts intended to ease the market oversupply begin to take effect from next month.
Most trading activity is now focused on oil to be delivered in June, which tumbled by more than a quarter on Tuesday to the lowest price for 21 years, to $15.12 a barrel, while oil for May settled at $3.80.
The price of Brent crude, the international oil benchmark, traded below $20 a barrel on Tuesday, around twothirds lower than it was in January before the outbreak of Covid-19 in China raised concerns in the market.
Trump promised to help ease the glut of oil in the market by buying barrels for the US government’s national strategic reserves. “We’re looking to put as much as 75m barrels into the reserves, which would top them out for the first time in a long time,” he told reporters.
But analysts have warned that US oil prices may fall below zero again in the coming months as the coronavirus crisis continues to take a toll on the industry.
Ole Hansen, the head of commodities at Saxo Bank, said the “historic and violent collapse” of US oil prices was “another reminder of the stress the Covid-19 has brought to the markets in recent weeks”.
“Can we see a repeat? The short answer is yes,” he said. “If we don’t see an improvement over the coming four weeks the June contract, expiring on 19 May, could suffer the same fate. We will undoubtedly see production cuts and bankruptcies across the US oil patch over the coming weeks. That, combined with a potential small pickup in fuel demand, may avert another collapse but the risk remains very elevated.”
John Browne, who was the head of BP from 1995 to 2007, said US prices would remain low due to a chronic oversupply of crude in the global market.
“The prices will be very low and I think they will remain low and very volatile for some considerable time,” Browne told the BBC. “There is still a lot of oil being produced that is going into storage and not being used.
“This is very reminiscent of a time in the mid-1980s when exactly the same situation happened – too much supply, too little demand, and prices of oil stayed low for 17 years.”
The 1980s glut sent oil prices tumbling and played a key role in the collapse of the Soviet Union and a political crisis in Algeria that led to a civil war.