It sounds preposterous but at least one analyst thinks there is a real chance the oil price will drop below zero!
Under this unthinkable scenario, oil producers will be paying consumers to take the commodity off their hands.
The shocking prediction comes after crude prices tumble to the US$20 a barrel price range. The Brent price benchmark was trading close to US$70 a barrel at the start of the year.
ASX energy stocks under fire
The collapse of the oil price is creating big headaches for ASX energy stocks, which have fared worse than the S&P/ASX 200 Index (Index:^AXJO) (ASX:XJO).
No one knows what a negative oil price will mean for these ASX stocks as it has never happened before. But perhaps someone should be trying to work this out after the Australian Financial Review reported that Mizuho Securities analyst Paul Sankey laid out a case for this radical scenario.
Why oil prices could drop below zero
Global oil storages are close to full capacity due to falling demand as COVID-19 brings global economic activity to a screeching halt. This is happening at a time when Saudi Arabia and Russia are flooding the market with extra supply in a bruising price war to gain an upper hand.
Sankey’s scenario is based on a speculation that oil production in some shale producing regions in North America overwhelms storage capacity. This will put an additional cost impost on these oil producers, who might find it cheaper to pay customers to take the oil.
Believe it a not, this has happened before. The AFR cited Specialist oil news service Worldoil.com as saying that a North Dakota sour crude variety briefly priced at -US50¢ a barrel four years ago in the wake of the last oil price crash!
Lower for longer
While not many other analysts are forecasting a negative oil price during this crash, a consensus is emerging that the crude price could stay below the marginal cost of production for longer than some investors might expect if the world runs out of places to put the excess crude.
This is a real fear among oil traders with some experts estimating that global storage tanks are already three quarters full.
Very cheap energy prices should be welcomed news for anyone who isn’t directly invested in the energy sector, but the fallout from the unusually low oil price is spreading across the market. Credit markets are sizing up from worries that oil companies will default on their debt.
This is making it hard for companies in other sectors to borrow as credit providers beat a hasty retreat.
There is such a thing as too much of a good thing!
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.