Now, Goldman Sachs is raising the possibility of negative crude oil price, at least for some landlocked oil producing countries due to supply gridlocks, sharply dipping energy demands globally and excess oil production — all due to the current Covid-19-related troubles around the world.
In its recent report on oil, Goldman Sachs analysts said “a producer would be willing to pay someone to dispose of a barrel, implying negative pricing in landlocked areas”. However, the negative oil price may not hold for oil-producing countries having access to sea ports, it said.
“Waterborne crudes like Brent will be far more insulated, staying near cash costs of $20/barrel with temporary spikes below. Brent is priced on an island in the North Sea, 500 meters from the water, where tanker storage is accessible. In contrast, WTI is landlocked and 500 miles from the water,” the report pointed out. So far in 2020, WTI and Brent crude prices have both lost a little over 65%.
The analysts also noted that the Covid-19-led demand shock, down by about 25% within a month, has made the oil price war between OPEC and Russia irrelevant and “has made a coordinated supply response impossible to achieve in time”.
The report also warned of possibility of large shut downs for production facilities and once demand revives, those are unlikely to open up quickly to meet the sudden spurt in demand. This in turn would lead to spike in oil prices. “Paradoxically, this will ultimately create an inflationary oil supply shock of historic proportions because so much oil production will be forced to be shut-in,” the report noted. And the key to how quickly prices rebound after this supply shut-in will depend on how much inventory is built, it said.