The world oil markets were turned upside down yesterday as the price of a barrel of crude crashed to less than zero dollars and up to late last night was trading at US60 cents a barrel—less than the cost of a bottle of water.
The precipitous fall in prices could spell more trouble for the T&T economy, leading to an even larger deficit and hurting Government’s attempts to avoid a free-fall of the economy and endangering state-owned Heritage Petroleum. (See other story)
Heritage Petroleum yesterday announced it will cease exports of its daily production and instead store the crude for the next two months in the hope prices improve.
Economists and industry experts have warned a prolonged period of low prices could lead to a catastrophic decline for the economy and Prime Minister Dr Keith Rowley has publicly asked if the country can sustain its subsidies and transfers in the midst of the depressed prices.
Energy economist Gregory McGuire yesterday contended that if the historic prices are prolonged, it could have a ravaging impact on T&T’s economy. He noted the drop came about because there was low demand.
“That has happened because everybody who has crude, physical barrels, are satisfied with their physical barrels that they have today—so nobody’s buying,” McGuire said.
He said the situation would remain volatile and prices low until the major economies of the world re-open. This means the T&T Government will have a much larger fiscal deficit—where the amount it borrows is much larger than the revenue it is generating to repay, he noted.
“Everybody is going to have to hold strain and take some pain,” McGuire said of the difficult period moving forward.
The last three months have been devastating for oil-based economies and a fall in oil and gas prices has left a $5 billion hole in the T&Ts budget, according to Finance Minister Colm Imbert.
Crude prices are about 30 to 40 per cent of total oil revenue and T&T makes more money for every barrel of oil it produces when compared to a barrel of oil equivalent of natural gas.
This has in effect meant less money to pay for things like CDAP, government pensions and to fund health care.
Energy Minister Franklin Khan yesterday said the low oil prices would have a different impact on T&T then other countries. He said T&T produces Galeota crude and Molo crude, which is referenced against Brent Crude that was trading at approximately US$25 to US$30 per barrel. Brent is the most commonly used benchmark price for crude oil traded internationally, including to Asia. Brent has become more popular a benchmark since West Texas Intermediate (WTI) has become more representative of the US industry than the global oil market.
“T&T’s crude prices, luckily are not subject to this subzero attack,” Khan said.
“Having said that, we are still in a very, very precarious position with the overall price of crude and how it affects the economy. So while we’re not in that disastrous calamity today, the market trend is still not showing any level of optimism.”
Khan also said the estimated loss of revenue because of the price hit could be even more than what was expected by Imbert.
When asked about Heritage Petroleum during this period, Khan said the company “luckily” has storage capacity for an estimated three months and is monitoring the market to discern when it can make its next shipment.
Asked whether Heritage will not make shipments until the prices rebound, he said, “Let us say ‘Ok I am not shipping until the market rebounds’ and then the market takes two and half months to rebound and all your tanks filled—you will have shut in your wells.”
He said there must be some sales along the way but this is for the experts to analyse and make a judgement of where the company’s optimum position lies.
When oil prices collapsed the first time due to COVID-19’s impact on the global market and geopolitical tensions between Saudi Arabia and Russia, Khan said T&T could be severely hurt as the country is a price taker.
Since then, there was a recent agreement by major oil producers to reduce global output by 10 per cent (10 million barrels a day). The deal was reported to be the largest cut in oil production agreement for many years.
Meanwhile, T&T Energy Chamber CEO Dr Thackwray “Dax” Driver believes the low price period will not be too prolonged, but said the country must adjust accordingly.
“While these extremely low WTI (West Texas Intermediate) prices are unlikely to last for a long time, Trinidad & Tobago needs to plan for a low price environment and have policy measures in place that reflect that scenario,” Driver said.
WTI crude oil futures plunged more than 100% to negative US $13.01, while Brent slid 7.4 per cent to US$26 a barrel.
Driver said the country is currently in uncharted territory and it is extremely difficult to predict what will happen with oil prices. He said yesterday saw the total collapse of WTI oil prices—which reflect prices for onshore producers in North America. The declines in Brent have been notable but nowhere near the same extent of WTI, he added.
Additionally, Driver said US natural gas prices rose slightly yesterday but are still at very low levels.
“Low oil and gas prices obviously have major implications for Trinidad and Tobago as we depend on these commodities for the majority of our export earnings, along with petrochemicals (whose price tend to reflect oil prices, though with some delays and nuances),” Driver said, noting it is very difficult to say how long low prices will continue because it largely depends on ending health-related COVID-19 lockdowns in the major markets.