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Why we’re seeing negative oil prices in Alberta and across North America

The unprecedented crude collapse comes amid the coronavirus pandemic, which has decimated demand and filled up storage spaces

The benchmark prices for Alberta and North American crude traded in the negative for the first time on Monday as the coronavirus pandemic wipes out demand and stockpiles accumulate. 

Western Canadian Select, the measuring stick for Alberta’s oil, fell below $0 — a situation that prompted Alberta Premier Jason Kenney to weigh in.

The North American benchmark — West Texas Intermediate — fell even further, with futures contracts trading at minus US$37.63.

As we enter a world of negative oil prices, here’s a look at what you need to know.

Negative oil prices, explained

The pandemic has reduced demand for oil as people spend less time driving or flying and companies slow down operations, reducing the number of goods that need to be shipped.

You’d think companies could just hold on to their oil if the prices they’re fetching aren’t worth it.

But too much oversupply around the world can mean storage options simply run out. That’s exactly what’s happening now — and a key factor in why prices are now dropping into the negative.

Here’s how Bloomberg explained the unprecedented collapse: “with the pandemic bringing the economy to a standstill, there is so much unused oil sloshing around that American energy companies have run out of room to store it. And if there’s no place to put the oil, no one wants a crude contract that is about to come due.”

Those crude contracts are what futures traders traffic in as they try to turn a profit. But now, there are no buyers for those contracts that designate Cushing, Okla., as the delivery point.

Cushing is a critical storage location for crude, but available space there is filling up fast as demand plummets. According to some estimates, Cushing’s remaining storage capacity could be maxed out in a matter of weeks. 

The situation has left futures traders with nowhere to park the crude to fulfill their contracts, which has sent markets spiralling.

Alberta oilsands production is being reduced

Alberta’s major weaknesses in the oil markets — being landlocked and the quality of its crude — were already on display before this crisis. 

Western Canadian Select plunged as low as US$5.97 per barrel in December 2018, according to data from the Government of Alberta. And it hit low single digits again in March of this year.

The price drop has prompted some companies to respond by cutting some production and reducing spending.

(If you’re wondering why companies don’t just halt operations entirely, experts say that’s simply too expensive in the oilsands.)

Less spending, less production and low crude prices are all bad news for oilsands workers. That’s why the federal government has announced $1.7 billion in funding to provide jobs cleaning up old, inactive oil and gas wells. 

While that’s good news for the environment and the economy, it also raises questions about handing a bill to taxpayers that is intended for industry.

How did we get here?

Beyond the COVID-19 pandemic, another key factor was a price war between Saudi Arabia and Russia that flooded the market with cheap oil at exactly the wrong time.

And despite a deal being reached to cut Saudi production, the aftereffects of the spat are still being felt as demand remains at record lows globally. But that reduction on the part of the Saudis failed to do enough to address the supply glut.

As stockpiles continue to accumulate, it’s clear the challenges for the oil industry aren’t going away anytime soon.

With files from Sharon J. Riley

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When those boxes of heavily redacted documents start to pile in, reporters at The Narwhal waste no time in looking for kernels of news that matter the most. Just ask our Prairies reporter Drew Anderson, who gleefully scanned through freedom of information files like a kid in a candy store, leading to pretty damning revelations in Alberta this spring. Long story short: the government wasn’t being forthright when it claimed its pause on new renewable energy projects wasn’t political. Just like that, our small team was again leading the charge on a pretty big story

In an oil-rich province like Alberta, that kind of reporting is crucial. But look at our investigative work on the Coastal GasLink pipeline to the west, or our Greenbelt reporting out in Ontario. They all highlight one thing: those with power over our shared natural world don’t want you to know how — or why — they call the shots. And we try to disrupt that.

Our journalism is powered by people just like you. We never take corporate ad dollars, or put this public-interest information behind a paywall. Here’s the thing: we need 300 new members to join this month to meet our budget. Will you join the pod of Narwhals that make a difference by helping us uncover some of the most important stories of our time?

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