On Monday, domestic oil prices dropped more than 200 percent, settling at -$14.05 by day's end; the West Texas Intermediate (WTI) crude oil price benchmark momentarily hit -$40.32. This marks the first time oil prices have ever dropped into the negatives.
Senate Appropriations Chairman Eli Bebout said Wyoming has seen its share of booms and busts, but he said "I don't think we've ever had a situation like we find ourselves in now."
The WTI price represents the value of oil next month, so buyers can lock into contracts at a price ahead of time. Today, that trading deadline ends and the final price for a May 2020 contract is settled, but the many entities who bought oil contracts suddenly found there is no demand for oil and no way to store it, either. So, many panic-sold their contracts.
"In order to avoid having to take delivery of the oil and not have any place to put it, they sold the contracts at a tremendous loss," said Clark Williams-Derry, energy finance analyst for the Institute for Energy Economics and Financial Analysis. "They actually paid people. In many cases, they were paying other parties to take the oil away."
There are two issues: demand and storage. Due to COVID-19 and international conflict, demand for oil has bottomed out. Carl Larry, market development performance director at the financial consulting firm Refinitiv, said the lack of demand for oil is unprecedented.
"In normal times, we've seen demand destruction. This has been demand disappearance," he said. "A product is only worth what people will pay for it or people aren't paying for it and it's not really worth anything. So, we're seeing that reality now."
That precipitous drop in demand has stopped the normal flow of oil from storage, leaving producers with little incentive to produce. In Wyoming, there's still some room to store oil, but Pete Obermueller, president of the Petroleum Association of Wyoming, said it's not enough.
"We really only have one pipeline that goes from our region from Wyoming down to Cushing, [Oklahoma] and that pipeline is full. And so when we run out of storage here, there's no place to send it," said Obermueller.
He said it would help if the federal government opened up the Strategic Petroleum Reserve as soon as possible. That move was announced in mid-March. For now, he says there's still room for Wyoming producers to store crude at a tank farm in Guernsey, but "it is filling and filling fast."
Mark Watson, supervisor of the Wyoming Oil and Gas Conservation Commission, said the world may run out of storage as soon as May.
Obermueller and Watson agree there's still time to improve pricing for the June contracts, but the industry needs to find a solution for demand and storage issues.
"If we can't get the storage situation figured out and at least a little bit of rebound in demand, I don't see a way that it can be better at the end of next month," he said.
There are solutions still on the table. In the short-term, many producers are shutting-in wells, a temporary strategy to avoid producing oil that won't be worth much. Larry said it's also possible demand will rebound as states partially reopen over the next month. In the longer-term, producers will have to wrestle with the plug-or-produce requirement.
Obermueller said producers on state and federal land will face a decision after shutting-in a well to either continue production or plug the well permanently. He's working to give producers more time before that deadline hits with the Office of State Lands and the U.S. Bureau of Land Management.
"You can't turn things on and off, even if you just shut in. But if you plug it, you basically abandon that area forever. And that's bad, obviously for the operator, but it's bad for Wyoming. It can, in some cases, strand that oil and make it next to impossible to recover in the future," he said.
Bebout said it's common sense for regulators not to require producers to plug a well right now. He added many solutions have been in discussion including royalty relief, extending federal leases and APDs [application for permit to drill], and help with bonding from the WOGCC.
Bebout said anything on the tax side would take legislative action which could come up during a special session. He said it will be important to address potential relief for the industry, which impacts tens of thousands of jobs in the state.
"The extractive industry in the State of Wyoming... there's about 20 [or] 30,000 jobs out there that all could be affected by the situation we find ourselves in. Devastating times," he said.
As of 8:25 am on April 21, the WTI price has gone back into the positives. Still, Larry said yesterday's drop has already set off a negative chain reaction with other oil-based investment funds.
The majority of rigs have stopped operating over the past month, with six still in play. Crude production represents the second largest tax revenue source for Wyoming bringing in about $280 million last year.
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