Goldman Sachs warns of negative crude prices

Mumbai: For some years now, the world has seen negative interest rates, that is, at least theoretically: borrowers receive a payment instead of paying the lender.

Now, Goldman Sachs is raising the possibility of negative crude price, at least for some landlocked oil producing countries due to supply gridlocks, sharply dipping energy demands globally and excess oil production — all due to the current Covid-19-related troubles around the world.

In its recent report on oil, Goldman Sachs analysts said “a producer would be willing to pay someone to dispose of a barrel, implying negative pricing in landlocked areas”. However, the negative oil price may not hold for oil-producing countries having access to sea ports, it said.

“Water-based crudes as will be much more isolated, staying close to cash costs of $ 20/barrel with temporary spikes below. Brent is priced on an island in the North Sea, 500 meters from the water, where the tanker is accessible. In contrast, it is landlocked and 500 miles from the water, ”the report noted. So far in 2020, WTI and Brent prices have lost just over 65%.

Analysts also noted that the Covid-19-led demand shock, which decreased by approximately 25% in a month, has made the oil price war between OPEC and Russia irrelevant and made it impossible to achieve a coordinated supply response on time.

The report also warned of the possibility of large closings for production facilities, and once demand revives, they are unlikely to open quickly to meet the sudden surge in demand. This in turn would lead to an increase in oil prices. Paradoxically, this will ultimately create an inflationary oil supply shock of historic proportions because so much oil production will be forced to shut down, the report noted. And the key to how quickly prices recover after this supply shutdown will depend on how much inventory is built, he said.