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Remember in math class when you reached imaginary numbers – the square root of negative 1?
That’s what one analyst thought of when oil prices went negative on Monday: “I feel as though I’m living that fear and dread once again. But they’re not imaginary, however negative they may be,” he said.
Why oil prices went negative, in 3 levels of detail
Level 1: The coronavirus pandemic has erased as much as 30% of global oil demand and producers have yet to cut even a fraction of supply.
- The world is now awash with oil that nobody wants, causing storage to fill up.
- People who owned contracts for oil were paying buyers to take their oil, sending the price into negative double-digits on Monday.
Level 2: Oil plunged into negative double-digits in part because of a market technicality.
- Usually, when people refer to the price of oil they're talking about futures contracts - meaning, the price of oil that will be delivered at a later date.
- The price that went negative Monday was for futures contracts to be delivered in May.
- Those contracts expired on Tuesday. So on Monday, traders - who are not equipped to take physical deliveries - were rushing to sell them to buyers who have booked storage.
- But with storage at near full capacity and little demand, few buyers wanted those deliveries. Traders instead had to pay them to take the oil.
Level 3: The oil price that went negative for two days was West Texas intermediate, or WTI.
- WTI is the benchmark for US crude oil, making it the most important futures contract to watch in the US.
- Globally, Brent crude is the benchmark, and while it's fallen by about 70% since the start of the year it's still far from negative.
- A big difference between the two benchmarks is proximity to markets. WTI oil is delivered to Cushing, Oklahoma - a city that is very much landlocked, unlike Brent.
- Storage in Cushing is expected to reach capacity by mid-June, according to UBS, and it's not as easy to send the oil elsewhere. That puts more downward pressure on the price.
The winners and losers when oil goes negative
From one perspective, no one wins. When the oil industry tanks, it drags down the rest of the economy. But some parties end up on top.
Winner - Companies who own storage or pipeline assets
Winner - Big oil traders who know how to play super contango
Loser - Many retail investors
Loser - Pretty much all oil and gas companies and the people they employ
- Oil companies that operate in the US shale patch need prices close to $40 a barrel to eke a profit. Today's price of WTI is about half of that … so yeah, it's not great.
- Nearly every major player has announced spending cuts. Many have laid off large swaths of their workforce. And a handful has cut their dividends - the latest, Equinor, was the first oil major to do so.
- We're tracking those moves for 18 of the top companies here.
So then, is it a bad time to start a degree in petroleum engineering?
I was curious about this - given that petroleum engineering is the highest-paid college major.
- On average, PE's earn almost six figures straight out of college (more than I make eight years out of college FWIW).
What professors told us: Basically, now could actually be a good time to get into the field.
- "It's probably the best time in the last five years to get into the field," one said. "When it looks the worst, go into PE. When it's at a peak, don't even think about it."
- "Jobs are much like the stock market - the ideal is to buy low and sell high," another said.
- You can read all of their advice here.
Pro tip: How to invest in oil
Energy stocks are down. Obviously. And that means they're cheap. So should you buy them?
Idk. But if you want to, Morgan Stanley has some helpful guidance.
These are the bank's top stock picks for oil and gas, along with its reasoning.
No, cheap oil won't derail the transition to clean energy
Goldman Sachs interviewed more than 100 investors since the price of oil started to slip, and that was one of their top questions.
I mean: Look, what's happening in the markets isn't good for clean energy - wind and solar forecasts for the year have already been slashed.
But: Those headwinds aren't specific to clean energy. If anything, renewable energy is more secure.
Plus: The bank shared several signs that the transition will endure.
- "The number of climate-related shareholder proposals has almost doubled since 2011 and the percentage of investors voting in favor has tripled over the same period," Goldman analysts said.
- Reserve-based lending for exploration and production companies is down 90% from the peak - and much of that money was redirected towards renewable energy projects.
- Oil majors like Shell and BP that are pledging to curb emissions will be less likely to accelerate oil field developments, they wrote.
You can read Goldman's answers to the top 5 investor questions here.
Teaser: Top energy CEOs explain what coronavirus means for their industries
Over the last two weeks, I've had the pleasure of connecting with top executives in the industry - from BP's Susan Dio to Sunrun's Lynn Jurich.
"Although we certainly did not envision the necessary widespread shelter-in-place orders that we're currently seeing across the country, I believe that Sunrun is a counter-cyclical business," Jurich said. "In the solar industry we've always had to be scrappy - that was one of the main lessons from 2008."
3 big energy stories we didn't cover
- Leading solar company SunPower "announced a pause on its global manufacturing and work cutbacks for all other employees, while further reducing executive salaries," Greentech Media reported.
- Equinor became the first oil major to cut its dividend - in this case, by two thirds, for the first quarter of 2020. Analysts have long projected that dividends of the world's majors would be at risk after the price of oil collapsed.
- Global carbon emissions are expected to fall by 5.5% this year, as the pandemic brings transportation and other industries to a halt, Axios reported. But to prevent temperatures from rising by more than 1.5°C over the coming decades - the target of the Paris Agreement - they'd need to fall by much more: about 7.6% annually.
That's it! Have a great weekend.
- Benji
Bonus: Here's a photo of the wasp that's trying to work with me right now.
