IEEJ：April 2020 ©IEEJ 2020
Special Bulletin
A Japanese Perspective on the International Energy Landscape (478)

April 30, 2020

Thinking about Turbulent International Energy Situation in April
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
April 2020 is ending after seeing unprecedented turbulence in international politics, theglobal economy and the international energy situation as the world is plagued with the devastating
COVID-19 pandemic. While the pandemic is still spreading even after infecting 3 million people andkilling 0.2 million people around the globe, once unimaginable impacts are hitting the world, withunprecedentedly powerful measures taken against the pandemic and economic contraction. Theinternational energy situation for its part has seen a series of inconceivable developments rattling theinternational community. Focusing on the international oil situation and oil prices on which thepandemic has exerted particularly dramatic impacts, I would like to review turbulent developments inApril and summarize two key points for considering the future in the following.
As crude oil prices were accelerating their crash, with the pandemic going on a rampage,
April began with U.S. President Donald Trump’s mediation between the Organization of the Petroleum
Exporting Countries and non-OPEC oil-producing counties in their reconstruction of the OPEC-plus
joint production cut initiative. The OPEC-plus group eventually agreed to cut oil production by arecord 9.7 million barrels per day from May, allowing oil prices to rally temporarily. In the market,
however, even the production cut was dominantly expected to fail to offset an oil demand plunge
estimated to exceed 20 million bpd, allowing a substantial oversupply to remain. So, crude oil prices
continued sinking. On April 15, the front-month West Texas Intermediate crude futures contract fell
below $20 per barrel at last. In a shocking event during the downtrend, the key WTI futures priceplunged into negative territory, closing at negative $37.63/bbl on April 20.
What are negative prices? Normally, a seller of a good receives a certain amount of moneyas the price of the good from its buyer. If the price is negative, however, the seller would fail to findany buyer or would have to pay some money to someone to sell or dispose of the good. The negative
WTI price resulted from a combination of special factors. Substantial oversupply in the internationaloil market and subsequent downward pressure on oil prices as strong background factors werecombined with two special factors: (1) the expiration of the front-month WTI futures contract andrelevant terms and conditions, and (2) a key storage hub for WTI nearing capacity in Cushing,
Oklahoma.
The day when the price became negative was the one day before the final trading day for
the May WTI futures contract. Market participants with long positions were then required to findbuyers to liquidate long positions and avoid taking physical delivery of oil upon the expiration of theMay contract. As the WTI storage hub in Cushing was nearing capacity due to a substantial inventory
increase, however, there were few buyers who could take physical delivery of oil. Market participantsrequired to sell oil to avoid taking delivery of oil had no choice but to pay substantial money or dump
oil to find those who would take delivery of oil.
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Negative prices have been seen sporadically in European wholesale electricity markets. As
electricity supply was required to constantly match demand, an oversupply caused by a factor like a
rapid rise in renewable energy power generation forced suppliers to pay money to sell electricity due
to supply bottlenecks in a case. In this sense, I had theoretically understood that negative prices would
be realized in the international oil market if such conditions were met. However, It had been verydifficult for me to imagine that the WTI futures price would actually turn negative.
The negative WTI futures price was attributable to the abovementioned special factors. From
the next day, the price of the front-month WTI contract turned positive, though remaining as low as
below $20/bbl. One of the implications from the special development is that if oversupply remains
substantial, onshore tanks, tankers and pipelines in the world could reach their storage capacity in Mayor June, leading to a serious development close to the front-month WTI futures contract’s plunge intonegative territory, as feared by oil stakeholders in the world. If the market is flooded with oil, it would
be difficult for sellers to find buyers. Then, oil could become valueless, with prices crashing to
extremely low levels or negative territory.
To avoid such unusually extreme development, oil-producing countries’ strategicenhancement of joint production cuts would have to be combined with oil-consuming countries’
expansion of strategic oil reserves based on their physical and economic limits. Oil-producing andconsuming countries would have to cooperate with each other. Such cooperation has already been
discussed at the Group of 20 and other forums. If such a development becomes likelier, it would be
more important for oil-producing and consuming countries to consider and enhance cooperation. If oil
prices fall to extremely low levels with their measures failing, market forces would lead high-cost oil
producers to exit from the market. Given that some time is required for market forces to complete
adjustments, complex and serious problems accompanying extremely low oil prices could weigh on
the international oil market over a long time.
As the second key point, I would like to cite lockdowns that would dramatically affect theoil market. In its latest analysis, the Institute of Energy Economics, Japan, projects that global oil
demand in the second quarter of this year would plunge by about 16 million bpd year on year to 83.3
million bpd. The International Energy Agency has forecast an even greater decline to 76.1 million bpd.
The biggest factor behind the dramatic oil demand plunge is human and goods traffic restrictions andpowerful lockdowns, which have been implemented in many major oil-consuming countries to preventthe pandemic from expanding. As a matter of course, macroeconomic contraction is also contributing
to lowering oil demand. A decline in international air and maritime transportation demand also exerts
great downward pressure on oil demand. However, lockdowns have devastating effects. The IEEJ’sanalysis of traffic restrictions and lockdowns under various assumptions indicates that global oil
demand would decline by 18 million bpd or 20%. The huge impact is behind the current substantial
oil oversupply, price plunges and downward pressure on prices.
The problem is that the future of traffic restrictions and lockdowns is very uncertain. There
are three important factors for assessing the impacts of traffic restrictions and lockdowns: (1) how
many people and regions would be covered, (2) how powerful such restrictions would be, and (3) howlong such restrictions would be in place. Each point is difficult to ascertain at present or forecast for
the future. The downward pressure of traffic restrictions and lockdowns on oil demand may differ
depending on changes in the three factors. Whether such restrictions would be enhanced further oreased and whether they would be enhanced again due to a second wave of the pandemic would exert
great influence on global oil demand, the oil supply-demand balance and oil prices. We should pay
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fine-tuned attention to relevant future developments.

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