Front Burner - In Brief: Why oil prices tumbled below $0

Episode Date: April 22, 2020

COVID-19 lockdowns have taken a major swipe at the dominance of oil…as the worth of a barrel of U.S. oil tumbled to less than nothing. That's the first time in history that the price has turned negative. So, what does that mean exactly - and how did it happen? To explain it all, we talk to CBC News national business correspondent, Peter Armstrong.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hey everybody, Jamie here. This is our nighttime brief edition. Hey, everybody, Jamie here. This is our nighttime brief edition. Here are a few big coronavirus headlines you need to know on Wednesday. Today, Prime Minister Justin Trudeau announced a $9 billion emergency program aimed at helping post-secondary students. These are people who are not eligible for other recently announced

relief programs like the Canada Emergency Response Benefit. The program, Trudeau said, addresses the upcoming summer job shortage that will give students and recent grads access to $1,250 a month from May until August. The PM also said his government is consulting with the provinces about their plans to start easing their pandemic response measures, but that each province will have to make its own decisions. Lastly, Quebec Premier Francois Legault and Ontario Premier Doug Ford have asked Canada's armed forces for assistance in fighting COVID-19 in long-term care homes. 130 medically trained military personnel were already slated to help out in Quebec, but today Legault said that he

needs another thousand. Quebec is the hardest hit province in the pandemic. Nearly 80% of the province's 1,134 COVID-related deaths are in long-term care homes. In Ontario, Ford said he is asking the armed forces to help inside the five hardest hit long-term care facilities, but he did not name them. Ford also faced a barrage of questions about how his province has handled the devastating toll COVID-19 has taken in these places. He was questioned about why it has taken until today to announce that all long-term care residents and staff would be tested in order to track the virus's rapid progression through the facilities. Okay, so now on to the second part of our episode, something we've talked about on the podcast before many times, the massive drop in oil prices. There's obviously a huge decline in demand for oil

due to the coronavirus. People aren't flying. They aren't really driving their cars. There's also been this price war between Russia and Saudi Arabia. And then earlier this week, a barrel of U.S. oil fell to below zero, negative prices. Some Canadian oil dipped below zero too. And this is the first time in history that this has happened. And to be honest, I don't really understand what this means. So CBC News National Business Correspondent Peter Armstrong is here to help explain all of this. Hey, Peter, thanks so much for joining me today. Nice to be back.

So look, right off the bat, I am not even a pretend. I understand what's going on here. How can something be worth negative money? I need you to explain this to me. How does a barrel of oil drop below zero dollars? It's important to sort of contextualize what we're actually talking about here. And while it is a barrel of oil, what it really is, is the futures contract for the delivery in May of a barrel of oil. So, you know, you can buy a contract for, let's say, a thousand or ten thousand or a hundred thousand barrels of oil. They get delivered to this enormous, these fields

of storage tanks in Cushing, Oklahoma. And, you know, as the coronavirus hit and as you say, jet fuel and gasoline and diesel, the demand for those all just cratered. The price of crude fell. So, you know, you have all these traders that are trading and holding these futures contracts. They started to worry as they saw that demand fall, because if you hold that contract and one trader described it to me as something of a hot potato at the end there, you're actually going to get physical delivery of a whole bunch of barrels of oils. Now, futures traders are not guys that run storage farms in Cushing, Oklahoma.

These are guys in suits in New Jersey and in New York that wouldn't know what to do with a barrel of oil in the best of times. And if there's thousands of them coming at you and all of a sudden you can't unload it because there's nowhere to put it, then it becomes that sort of hot potato and you're just trying to take it off your hands. So as those storage tanks filled up and there's just nowhere really left to store it, like people are literally saying, I don't know, get a swimming pool and try to fill it up. All of a sudden those contracts became that hot potato where you're just trying to get it off your hands. And it made more sense for one trader to say to

another, listen, I'll pay you to take this contract off my hands because I don't even know how much it would cost me to try to go down to Oklahoma or somewhere else and find some kind of broken down tank to put this stuff in. Did they find a place to put this oil when they were sort of basically trying to pay people to take it off their hands? Like, where is the oil now? That, I think, is the most interesting part of all of this.

The day before the May contract came due was when we saw the negative 37, negative $40 price for this. By the time the contract actually closed at the end of the day on, I've lost track of the days now, let's say Tuesday. I know. What are days anymore? What are days anymore? What are days anymore? There are no days.

No, so I think by the end of the day, Tuesday, the contract actually closed. And if you were the guy holding the hot potato, you were gonna get delivery. And that's what everybody was scared of. But between sort of Tuesday morning, when it opened at negative 37, and Tuesday evening when it closed,

somebody somewhere clearly found some extra capacity because it bounced back up to I think it went up to $12 or $9 or something per barrel. And all that was was we just saw the squeeze. The guy who predicted a month ago that we could reach negative prices is now saying we could reach negative 100 prices per barrel of oil in the next month or two. Wow, this could get even worse in June and July. Why don't we just make less oil? Well, so that's the mechanic of what's kind of happening here. The market is saying there's too much oil. And it's the only thing that can really slow down production. Because, you know, every individual producer is like, well, we're already up and running. There's oil just sort of coming out. You can't just sort of knock

it off. You know, you've seen rig count. The count in the United States looks at how many rigs are actually drilling for oil has fallen, I think, 35% since March. And that makes sense. And so we'll now see a curtailment of sorts as production finally gets slowed down to try to address this oversupply. Okay, one thing I'm curious about, we've seen this historic drop in oil, but then why aren't my gas prices, for example, substantially lower right now? Like, I know they're lower, but they're not hitting like rock bottom deals here. You're never gonna see negative prices in gasoline, if only because the oil is just one part of what makes up gas.

Pete Evans, one of the smart guys in the business unit, did a piece looking early on in the COVID crisis at what will happen to gas prices. And he talked to a guy that said, for every dollar that oil drops, in the COVID crisis at what will happen to gas prices. And he talked to a guy that said, for every dollar that oil drops, you'll see about a 0.6 cent drop in gasoline. And that speaks to the cost to refine,

the cost to ship, the cost to store gasoline once it's no longer oil. You've got whole storage issues there as well. And well, I think it's easy to look out and say, well, gas prices haven't dropped a lot. StatsCan came out this week with a look at gas prices and found they fell, I'm just looking into my notes here, I think it's 21% since March, which is a pretty big drop. The cheapest price in Ontario right now is 63 cents a liter. In Edmonton, it's down to 54 cents a liter. Halifax, 65 cents a liter. It's pretty cheap and it has

dropped. But I think when you hear something like WTI fell at its peak, you know, 320%, you think, well, wow, gasoline is going to be, they're going to pay me to fill up my gas tank. No, that's not going to happen. You see a lot of people on Twitter be like, oh, maybe I should buy a barrel of oil and someone will pay me to keep it like on my balcony or something. And that would make sense if you were a futures trader, but you're probably not. And so you don't actually have access to that. One of my favorite reporters on this file is Tracy Holloway from Bloomberg. And I'll tweet out a link to this story because it's fantastic, in which she tried to buy a physical

barrel of oil from these futures guys. And they looked at her like she had nine heads. They're like, what are you talking about? You can't do that. It is an incredibly complex, it is an incredibly convoluted market. And then it's a futures market on top of that, which is even sort of more complicated. So no, you can't just go out and buy a barrel of oil. You could probably buy a contract for some. And if you had somewhere to store thousands of barrels, you were set to make a whole lot of money because as you say, it went down to negative $37 per barrel. And now if you deliver it in even July, you'd be selling it for $21. So that's, that's a pretty healthy profit right there, nearly 60 bucks a

barrel. How does this affect the rest of us? How does this affect the Canadian economy, for example? Well, I mean, I remember being on the show once and talking about, yes, oil prices mean gas prices will go down. And yes, that feels good at the tanks. But you have to think, at least in the back of your head, that you're only getting 63 cent gas because the economy's in the tank. And that's even more pronounced now. And remember, energy in Canada had collapsed from 2014 to now. But even last year, it made up 9% of the Canadian economy. These are good jobs. These are well-paying jobs. These are jobs that people from across the country flock to and then go home to New Brunswick and Ontario and Newfoundland and BC and spend

money that they made in the oil industry. The oil industry, the energy sector writ large, is responsible for billions of dollars in capital investment that helped Canada grow. for billions of dollars in capital investment that help Canada grow. And the ancillary benefits of that are, you know, lawyers and accountants and coffee shops and all of these other things that grow when the economy is doing well. And we are looking at a dramatic change, not just to Canada's energy sector and oil industry, but to that writ large across the entire planet, around the world. And we've talked about this with you a couple of times lately.

I was struck this week by a quote that came from Greg Polzer, University of Saskatchewan political scientist. He just said, these kinds of scenarios only happen when you're in a depression. The impact of this will carry on for a number of

months, months, not weeks. Oh, and I mean, the legacy of this, this is going to leave a massive scar across the economy of Canada and indeed around the world that will linger with us for years. And think about, you know, when things are good, people are confident and they buy things and the economy does well and it becomes this whole sort of cycle that feeds off itself. Coming out of this, people are going to be scared. They are not sure about the jobs they have, especially if they work in the energy sector, especially if they work basically anywhere in energy producing provinces. Newfoundland, Alberta, Saskatchewan, BC,

are all going to have a harder time getting their economy up and running because people are going to be scared. Remember, we, the consumers, were the ones who did the heaviest burden of lifting after the 2008-2009 financial crisis. They lowered interest rates. It was the me's and you's of the world, Jamie, that took advantage of low interest rates and went out and bought stuff. And we bought houses, and we renovated houses, and we went on holidays, and we loaded up our HELOCs. And in doing so, we saved the economy. We cannot count on that same level of sort of consumer enthusiasm coming out of this because the economy is going to be damaged. And the energy sector is such an important and crucial glimpse into what that damage actually looks like.

So I'm hoping then that we can end today on homing in a little bit more on these provinces. Peter, it feels like a million years ago, but it's only maybe a couple of months ago now. I remember we were talking about the tech frontier oil sands mine. And critics were saying that these projects, these massive projects that were so important to Alberta's future and economy, you know, were only viable if oil prices were closer to like $65 a barrel. And now we're seeing negative prices or just completely gutted prices

and you know two weeks ago alberta premier jason kenney say that is saying that they're going to press forward with trans mountain but like what does all this mean for all of these projects and like the future of a province like alberta well let's divvy that up into two. What it means for those projects is nothing good. And we'll see sort of at the other side of this crisis what decisions start to get made. But then think about it from a governance perspective. for every dollar a barrel of oil falls, right? That if it falls from $57, which is where the Alberta government had based all of its budget projections in terms of revenues and royalties and tax, all of that, they thought and projected going forward

that WTI, the main North American benchmark, would be at $57 and rise to, I think, $63. It's now at, I think, whatever it is, $12 for delivery in June. For every dollar that that falls, that's an $800,000 to $900,000 gap in Alberta's finances. You look at, this was supposed to be the year that Alberta's real estate sector was going to turn around. And now it gets clobbered with all of this. And not just the COVID lockdown, which is clobbering real estate across the country, but the particular clobbering that the energy sector is taking. This is,

as I say, this is going to leave a big scar that we will see for years to come. Okay, God, Peter, thank you so much. You know, the more this goes on and on, I lose sleep over sort of the hurt and the damage that feels like it has been caused here and how this is going to linger for so long for so many people. It is a generational, it is a historic event. You know, when we look at what the government is trying to do in terms of bridging people to the other side, I think that's important.

I think in the way we reach out and talk to, you know, I was at the grocery store the other day and somebody was barking at the lady behind the counter. You know, if ever there is a time to be kind to one another, this is it. Okay, Peter Armstrong, thank you so much. You bet. In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. All right, that's it for today.

I'm Jamie Poisson. Thanks so much for listening to FrontBurner and we'll talk to you again tomorrow morning. We have an episode which is a very intimate and inside look into the ICU at Markham Stouffville Hospital.