Oil price slump rocks oilfield mineral outlook

By William Clarke
Published: Tuesday, 12 May 2020

Oilfield mineral markets have been rocked by negative oil prices.

The frac sand and oilfield mineral markets are facing a massive drop in demand after negative oil prices rocked the drilling industry in the United States. The unprecedented situation of a negative US oil price was created by a "perfect storm" of oversupply, falling demand and glutted storage capacity.

US oil logistics have been struggling to keep up with soaring domestic production. This boom in production, driven by fracking across the country, but most particularly in the Permian Basin, has had oil pipelines working at full capacity for years. New pipelines have only been able to keep pace with increasing production.

For this reason, oil prices in many parts of the US have already been trading at significant discounts to the WTI benchmark price. This benchmark is assessed on the price of oil on delivery to Cushing, in the US state of Oklahoma, which is the center of the oil logistics network and home to a huge amount of storage capacity.

But brimming US oil storage capacity was badly placed to deal with an increase in supply, or a decrease in demand. The Covid-19 pandemic created both those things. Domestic demand plummeted thanks to the economic shutdown. And an ill-judged price war between Saudi Arabia and Russia in March flooded the international markets with supply, stalling exports.

The result was that the tanks at Cushing finally filled up, just as the May futures contract neared its expiry date. In essence, that meant that anyone holding a single lot of the expiring May WTI contract will by the end of the month be forced to take ownership of 1,000 barrels, or 158,987 liters, at a location where storage capacity is nearly impossible to find.

This set off a frantic game of 'hot-potato’, with traders desperately trying to cast off the contract, and with it the legal responsibility for handling unwanted crude oil. The May contract collapsed from $18 per barrel to -$38 per barrel in the final few hours of trading on Monday April 20.

The focus has now moved to the June contract. The contract closed on Tuesday, down 43% at $11.57 per barrel.

Oil producers now faced the worrying possibility that their output was near to worthless, or could even cost them money. This threatened to be a huge blow for the already embattled fracking industry.

On April 17, oilfield services company Baker Hughes reported a drop in the number of active drilling rigs in the US of 66 week on week, bringing the total count down to 438 active rigs. This was the lowest number of drilling rigs since October 2016, and a drop of 47% year on year.

The closure of drilling rigs was extremely bearish for frac sand, but prices have not moved lower so far because they have been under heavy pressure from oversupply since 2018. The industry has already seen a slew of bankruptcies, due to a glut of cheaply mined sand of Texas origin.

Fastmarkets’ frac sand, northern white,100 mesh, API, exw Wisconsin price was $27-32 per short ton on March 19, stable month on month.