If you thought the collapse in oil prices this week was bad, next month could be “fundamentally worse,” with prices falling to -$100 a barrel, says one energy strategist.
“Oil is difficult to handle and if you can’t put it anywhere, it becomes an environmental liability literally. So over this next month storage is now effectively full, you could see some extreme negatives in terms of prices offered,” Paul Sankey, managing director at Mizuho Group, told Yahoo Finance.
On Wednesday WTI crude for June delivery (CLM20.NYM) rebounded from a price bloodbath earlier this week. On Monday WTI (CL=F) May futures which expired April 21st fell below zero for the first time in history. Oil producers were paying buyers to take crude off their hands as storage capacities were full of unused oil.
“The problem in the market today is really one of infrastructure and storage. Of course the biggest problem being that demand is down at absolutely previously unseen levels in the modern era,” said Sankey.
Crude prices could go negative again as 40 million barrels of Saudi oil are currently on route to the U.S. The shipment was agreed upon in March before much of the economy came to a grinding halt amid COVID-19.
“Those barrels take 45 to 60 days to arrive. And we can see this a flotilla of tankers that are coming towards the U.S. market … We really can’t handle it at all.”
Expect ‘mega mergers’
Energy companies have been forced to slash their capital spending and suspend new projects amid a collapse in oil prices as economies are at a standstill due to COVID-19.
Some US oil drillers may not survive the months ahead. Reducing production is difficult since shutting down some of the older, smaller wells puts them at risk of never reopening.
“The real challenge is it’s difficult to shut down production as quickly as COVID hit, obviously. And so we’ve just got this terrible month ahead of us.”
Sankey wouldn’t be surprised to see major consolidation ahead, including the possibility of a tie-up between Chevron (CVX) and ConocoPhilips (COP).
“The idea of a mega merger really comes from what we saw in the 1990s when the oil price was last this low, you actually got below $10 a barrel WTI in 1998 … At that point you saw a major round of really big mergers,” said Sankey.
“The oil industry has overpaid themselves. Executives have made far too much money. It’s been an embarrassment,” said Sankey. “Maybe we should just get rid of some of these people and have a lot fewer companies. And I think that’s what will happen.”
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Ines covers the US stock market from the floor of the New York Exchange. Follow her on Twitter at @inesreports.
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