Talk about a world turned freakin’ upside down! Never in my decades in the energy business would I have expected to see oil producers paying others to take their oil off their hands.
OK, so it wasn’t the oil producers themselves who paid. Actually, it was the gamblers who had earlier placed bets on oil futures. When the deadline for their futures contracts hit, they had to offload the contracts for a loss or take delivery of the oil. Futures traders don’t like to take delivery, so they likely found another futures buyer but basically had to pay them to take the contract — still cheaper than taking delivery and absorbing the transportation and storage costs, if they could even find storage.
The average Joe is unaware of all these shenanigans that go on behind the oil markets, so it looked to him like oil producers were giving away their livelihoods, or even paying to do so. Though the negative prices only lasted for the day it took futures traders to close out their expiring contracts, experts worry the same could happen again when June contracts come due at the end of May.
Plenty of experts are out there talking about what this means for U.S. oil producers, and I even recently wrote about how we could expect a giant surge in bankruptcies with oil prices hovering around $20 a barrel. But, criminy!, even that prediction could pale with a looming threat of negative prices.
I’m thinking instead about how negative oil prices could affect new energy startups, as well as their investors (or potential investors), and whether oil storage could enter into investors’ thinking.
New Energy Startups and Negative Oil Prices
When we are talking about new energy startups, we’re really looking at two sectors of the energy industry that would be impacted differently by negative oil prices:
1. Transportation
Companies involved in the transportation sector, such as electric cars and biofuels, certainly could expect to see a negative impact on their business if gasoline prices remain ridiculously low. Consumers will have less incentive to drive electric cars vs. combustion engines with gasoline so cheap. Biofuels will struggle to compete with low-priced fossil fuels. But this should be a temporary hiccup in a more energy-conscious world.
2. Electricity
Startups in the electricity generating field will face less direct impact from low oil prices; very little electricity is generated using oil. However, natural gas prices could show a companion decline, especially if more oil producers see an opportunity to switch over to natural gas production. Then, companies could see greater competition from gas-powered generation plants.
Changing attitudes about fossil fuels and concerns for climate change, both among individuals and most governments around the globe, would lessen any impact negative oil prices have on emerging energy companies. Many governments have, and are unlikely to rescind, policies to promote sustainable, climate-friendly energy sources.
Impact of Negative Oil Prices on Investors
After a lot of turbulence, oil futures might have finally run aground.
Many, many, many investors are going to be burned and lose their full investments as oil production, oil drilling, and oilfield service companies declare bankruptcy and shutter their operations. Banks and other investors were crazy to pour money into the industry when oil prices appeared to be steady above the $100 per barrel level.
That all changed by the mid-2010s when overproduction drove oil prices down toward the $60 per barrel range. That’s pretty much the break-even point for shale oil producers in the U.S., so as prices began to plummet even lower in the wake of the coronavirus and slumping demand, those producers were in big trouble. Then add the game of Russian roulette between Saudi Arabia and, well, you know who, and the future looked even grimmer.
Now, the third shoe drops: all that oil keeps pumping, but there’s no place for it to go as refiners stop processing and storage fills up. This means storage prices are also skyrocketing. Companies that shut down their wells risk ruining the reserves and facing the prospect of not being able to reopen those wells when prices do bounce back.
Basically, debt-laden oil producers and their financial backers are screwed and have little hope to tough it out. Government bailouts, which are still under consideration, could help the stronger entities weather the storm. But even bailouts will only buy time for many companies.
This creates a double-edged scenario for new energy startups. First, investors burned in the oil business will have less money to invest and might not be willing to give any player in the energy sector another look. If they turn their attention to Silicon Valley or med-tech investing with hopes of finding a safer bet, energy startups could struggle to get their foot in the door.
On the other hand, investors burned in oil, or those thanking the stars they kept their money away from oil, could consider new energy technologies a more stable opportunity. The trick will be in convincing them. Though energy startups do show potential for positive returns, that payout period could lag behind other traditional technology companies, far, far away from the energy sector.
Will Investors Lean Into Oil Storage?
All of this circles me back around to my other thought for this blog post: Will investors eye this crazy scenario as an opportunity to consider investing in oil storage? I’ll give you sneak peek into my answer (I sure as hell hope not), then get into the explanation.
The oil industry — particularly the debt-burdened U.S. shale oil sector — was already in trouble before this lovely thing called COVID-19 came along. But COVID came with a hammer, and a d—ed big hammer at that.
According to an excellent article in the Wall Street Journal, worldwide daily demand for oil is expected to fall as low as 70 million barrels a day. That still sounds like a lot of oil. But when the industry is producing 100 million barrels a day, that’s trouble.
Where will that extra 30 million barrels go? The only answer is: into storage.
Global onshore storage capacity totals 4.4 billion barrels and, as of mid-April, was at about 65 percent capacity. As of early April, that capacity was filling at the rate of 10 million barrels a day, according to commodities-analysis company Kayrros. Imagine tripling that rate.
You might think that 35 percent of our capacity still would take us a long way toward being unable to store any more oil. Chris Midgley, head of analytics at S&P Global Platts, notes that between 30% and 40% of storage in the United States of America is unavailable because it’s under the control of traders and operators. He estimates those numbers are similar across the globe.
In this case, control is power. Midgley also notes that Saudi Arabia has been the king of oil storage, though Kayrros thinks their capacity has been filling up. The Saudis recently bought up the storage in Egypt.
The Saudi strategy has been that “ours should be the last tanks that need to be filled — the last tanks standing,” Midgley told the Wall Street Journal. “Everybody wants to be the last.” I think this was the same strategy as the wealthiest person very to walk this planet (besides Mansa Musa of Mali, who?), John D. Rockefeller.
Guess who’s making money at this time? You bet: the people who control the storage. Storage prices have risen sharply and will only go higher as the situation drags on.
Does that mean oil storage is a good bet for investors going forward? That’s not a bet I’m willing to place.
Take one tiny example. In January, the Caribbean island of Curaçao reclaimed control of its Refineria di Kòrsou from the beleaguered Venezuelan-controlled oil company to regain access to its 15 million barrels of storage. The government has been scrambling to do maintenance and safety checks to get the facility back up and running, hopefully in June. That’s at least six months to get a small, existing facility up and running.
Building out new oil storage is likely to take years. And the most likely players to do so are the companies and countries, like Saudi Arabia, who already are the big guns in the game. Plus, by that time, we should be past coronavirus and ramping up energy demand.
Do You Want to Be a Futures Trader?
The current situation also calls into question the efficiency of the business behind the oil market.
Futures trading has long been a part of the oil industry. It’s designed to give producers some sense of control over the price they will get for their oil before they pump it out of the ground.
But in the cycle of supply and demand, when demand runs the show, who really has the control? Since the energy crisis of the mid-70s, it’s often been the Saudis and their OPEC partners. Placing bets on the way forward seems to be an even more risky proposition.
Sure, people will keep making money on fossil fuels moving forward. Sometimes it will be the producers. Sometimes it will be the storage controllers. Sometimes it will be the futures traders.
This crazy situation right now has me convinced we need to look farther into the future and follow those dreamers who are exploring new energy technologies. The oil market has been volatile for decades and will continue to be volatile in the future. If you’re willing to place your hard-earned money there, go for it. But do not forget to follow my previous musings about your social responsibility!
I’m going to be here for the investors who want to look into the future and commit to a new way of meeting our globe’s energy needs. Contact me to let me know your thoughts about the future of energy.
