zbynek-burival-oilsands

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

Like what you’re reading? Sign up for The Narwhal’s free newsletter.

New title

You’ve read all the way to the bottom of this article. That makes you some serious Narwhal material.

And since you’re here, we have a favour to ask. Our independent, ad-free journalism is made possible because the people who value our work also support it (did we mention our stories are free for all to read, not just those who can afford to pay?).

As a non-profit, reader-funded news organization, our goal isn’t to sell advertising or to please corporate bigwigs — it’s to bring evidence-based news and analysis to the surface for all Canadians. And at a time when most news organizations have been laying off reporters, we’ve hired five journalists over the past year.

Not only are we filling a void in environment coverage, but we’re also telling stories differently — by centring Indigenous voices, by building community and by doing it all as a people-powered, non-profit outlet supported by more than 3,500 members

The truth is we wouldn’t be here without you. Every single one of you who reads and shares our articles is a crucial part of building a new model for Canadian journalism that puts people before profit.

We know that these days the world’s problems can feel a *touch* overwhelming. It’s easy to feel like what we do doesn’t make any difference, but becoming a member of The Narwhal is one small way you truly can make a difference.

If you believe news organizations should report to their readers, not advertisers or shareholders, please become a monthly member of The Narwhal today for any amount you can afford.

The lessons for British Columbia in Alaska’s epic Bristol Bay sockeye run

Every summer, biologist Daniel Schindler walks hundreds of kilometers up and down the Wood River in Alaska, counting red and green sockeye salmon homing to...

Continue reading

Recent Posts

Help power our ad-free, non‑profit journalism
The Narwhal has arrived in Ontario!

Guess what? We just launched an Ontario bureau. Keep up with the latest scoops by signing up for a weekly dose of our ad‑free, independent journalism.