Expert warns that the oil price can fall below zero!

It's not unthinkable for the crude oil price to drop below zero and this will have ramificiations for ASX energy stocks like Oil Search and Woodside Petroleum.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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).

These include market heavyweights like the Oil Search Limited (ASX: OSH) share price, the Woodside Petroleum Limited (ASX: WPL) share price and the Santos Ltd (ASX: STO) share price.

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.

Double-edged sword

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!

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.

More on Resources Shares

a sad looking engineer or miner wearing a high visibility jacket and a hard hat stands alone with his head bowed and hand to his forehead as he speaks on a mobile telephone out front of what appears to be an on site work shed.
Resources Shares

Down 14% in 2024, why is the BHP share price sliding again today?

ASX 200 investors are bidding down the BHP share price on Wednesday.

Read more »

A mining employee in a white hard hat cheers with fists pumped as the Hot Chili share price rises higher today
Resources Shares

These ASX 200 mining stocks could rise 40% to 50%

Analysts think these miners are dirt cheap at current levels.

Read more »

Image from either construction, mining or the oil industry of a friendly worker.
Resources Shares

Fortescue share price leaps 5% as electric machinery makes a milestone

Fortescue is charging ahead with its electric mining ambitions.

Read more »

rising mining asx share price represented by happy woman miner in hard hat
Resources Shares

Why the BHP share price crushed the benchmark this week

BHP shareholders enjoyed a rewarding week.

Read more »

A man wearing a hard hat and high visibility vest looks out over a vast plain where heavy mining equipment can be seen in the background.
Dividend Investing

Here is the profit forecast to 2026 for BHP shares

Let’s unearth how much profit this miner could make.

Read more »

Female miner standing next to a haul truck in a large mining operation.
Resources Shares

Is the worst of the selling now over for ASX iron ore shares?

ASX iron ore giants like BHP, Rio Tinto and Fortescue rebounded this week after falling hard in 2024.

Read more »

Three satisfied miners with their arms crossed looking at the camera proudly
Resources Shares

Why are ASX 200 mining shares smashing the benchmark on Wednesday?

Rio Tinto, BHP and Fortescue shares are all charging higher today.

Read more »

Two miners standing together.
Resources Shares

Why is the South32 share price getting battered today?

ASX 200 investors are bidding down South32 shares today.

Read more »