<< Back

Negative Oil Prices?

Oil That's Difficult to Refine and Transport Trades at a Discount to WTI & Brent

In 2016, EnergyWatch wrote about the possibilities of negative oil prices, although it seemed farfetched.  Today, April 20th, 2020, oil prices fell into the negatives for the first time.  The blog post, however, still remains relevant with valuable insights to what negative oil prices mean for the consumer.

EnergyWatch’s 2016 blog post:

How low can oil go?  Every morning we’re hearing about crude oil prices heading lower and lower into the $20s.  In 2016, JP Morgan cut its forecast to $31.50 per barrel, the most bearish revision yet from Wall Street.  But is it possible for oil prices to go negative? Yes, and I’ll explain how and why.

Types of Crude Oil

When the media quotes oil prices, they’re usually referring to the benchmark prices, either WTI (West Texas Intermediate) or Brent.  WTI is the underlying commodity for NYMEX oil prices, a benchmark for the USA, while Brent is the benchmark globally (kinda like Imperial vs. Metric – we have to be different).  There are various grades of oil, defined most notably by differences in the density and the sulfur content: heavy or light, sweet or sour.

1-19-16 - Crude Oil Grades

WTI and Brent are both light and sweet, the most valuable grade of oil as it is most easily refined into high quality gasoline and diesel fuel.  While light and sweet crude prices will move based on various fundamentals affecting supply and demand (such as global macro conditions and OPEC production), it’s unlikely these benchmarks will ever be negative.

1-19-16 - Crude Benchmark Pricing

Negative Oil Prices

However, various other grades of oil can trade at a steep discount to these benchmarks due to the expensive refining and transportation process.

Flint Hills Resources LLC, the refining arm of billionaire brothers Charles and David Koch’s industrial empire, said it would pay -$0.50 a barrel Friday for North Dakota Sour, a high-sulfur grade of crude, according to a list price posted on its website. That’s down from $13.50 a barrel a year ago and $47.60 in January 2014. – BloombergBusiness

Basically, this refiner is saying it will charge you $.50 per barrel for it to take North Dakota Sour off your hands.  Aside from the high cost to refine this oil with its high sulfur content, the only transportation options are more costly train or truck since Enbridge won’t allow high-sulfur crude in its pipelines.

1-19-16 - Flint Hill Crude Posting

Relevant Notes:

  • No, your heating oil or gasoline won’t be negative anytime soon
  • “The global deflationary supply glut has now reached the point that the market is effectively forcing producers to pay to give their oil away or else see it sit in bloated storage facilities until Riyadh decides enough is enough and until the world comes to terms with the return of Iranian supply.” – ZeroHedge
  • If you’re in the US, this has nothing to do with your power pricing. There is zero correlation between oil pricing and power pricing.  The marginal, price setting generation in most territories is natural gas.  Download our free Electricity Markets Explained report to learn more.
  • Natural gas quotes from the media are similar to oil.  The media quotes a benchmark (NYMEX Henry Hub), but local pricing can be very different based on local market dynamics.

1-19-16-Delivered-NG-Pricing-Map

EnergyWatch’s cloud-based energy management platform, watchwire, helps you monitor your energy usage and manage uncertainty about pricing.  Shifting policies and regulations often causes changes (i.e. increases) to a company’s utility bills that need to be understood and properly budgeted. Watchwire tracks all billing line items so you can analyze year-over-year variances in pricing components such as capacity, create accurate energy budgets, and ultimately track budget variances.  Learn more about watchwire here or reach out to EnergyWatch with any questions.