U.S. oil futures trade negative for first time in history

OPIS Global Head of Energy Analysis Tom Kloza joins Yahoo Finance’s Seana Smith to break down the latest energy news, as U.S. oil futures trade negative for the first time in history.

Video Transcript

SEANA SMITH: I was just talking about his massive selloff that we are seeing in oil today, falling all the way to a penny a barrel. I mean, this is something that most people on the Street didn't even think was possible. And as we see it flirt with the negative territory, I want to bring in Tom Kloza, Head of Energy Analysis at OPIS Global.

Any Tom, when we take a look at this massive move to the downside that we are seeing in oil so far today-- I mean, what do you make of this? And what does this mean for the broader market?

TOM KLOZA: Well, a couple of things. Number one, this is not based on necessarily fundamentals. This is based on the opposite of a short squeeze, where there was a tremendous amount of people who still own paper WTI.

You might say why take it these days? And they had to get out. And when there's the smell of distress in the nostrils of some of the sellers, they took advantage of it,

So I've never seen a penny per barrel for crude oil. We saw that earlier today. I would tell you that in your audience, you have seen the lowest prices you are likely to see in your lifetime, whether or not you're a centenarian or not. And it's probably more realistic to look at the prices for Brent, which are down today, but they're about in the mid 20s.

And I would not infer from this that you're going to necessarily see gasoline or diesel or jet fuel prices dive by a similar amount. These are desperately trapped longs who could not get out of those positions today.

SEANA SMITH: Tom, if we do see negative prices, which is extremely likely at this point, how does this complicate things? What does this mean for the average investor? And how could this potentially see even more of a disruption here for the broader market?

TOM KLOZA: It probably doesn't mean that much for the average investor. We've actually seen negative prices before in the energy business. We've seen it for megawatts. We've seen it for natural gas mid-Texas. And we've seen it for propane in Canada after the war tax year.

So we've dealt with that. I don't think most of us ever thought that we were going to deal with negative crude oil prices, certainly not in May of any particular year. And that's the delivery here.

But I think we're finishing up the first third of the year. And you might need a fit to sort of finish the third if you were long in crude oil. And I don't think people should look at this and say we're going to see much more of the same.

Believe it or not, the OPEC Plus meeting did sort of result in a significant agreement. It's not going to help in the second quarter necessarily. But it will help prices recover this summer, and then later this year.

SEANA SMITH: When we do see the prices recover later this summer and later on this year, what's going to get the price of oil moving to the upside? What do we need to see in the broader market in order for us to see some stabilization here?

TOM KLOZA: You're going to see shut ins. I mean, you're at numbers now, really sort of in the teens, and in places like the Bakken in West Texas or whatever-- you know, forget about that future sprint for the moment, and just look at the distressed numbers elsewhere. That's going to shut in production in places like shale.

Almost all the frackers were way, way, way below break even. That's going to shut in production in the oil sands. And it's probably going to shut in production deep water.

You know, after the OPEC Plus meeting, we heard, oh, 9.7 million barrels a day cut-- which starts in May, by the way. We heard the president take credit for a 20 million barrels a day cut. We'll probably see a cut almost on the order of 20 million barrels a day. But it won't be the result of the meeting, or the cartel. It'll be the result of prices driving oil wells to be shut in.

SEANA SMITH: John, do you we'll see an acceleration of bankruptcies in the energy sector because of this?

TOM KLOZA: Absolutely. I mean, we're going to see a lot of bankruptcies among small energy and exploration companies, and midstream companies, and particularly those with a high debt load. I don't think you'll see anything really impact the major oil companies. But they're coming off a terrible decade, you know, a decade that was really not influenced as much by WTI as the notion of ESG, environmental and social governance.

So you don't have a lot of investment money flowing into anything fossil fuel-related these days. And my suspicion is it's going to be a rough rest of 2020, and even into 2021 as well.

SEANA SMITH: Tom, we had the CEO Parsley Energy-- he was on the show last week, just talking about the massive selloff that we've seen in the price of oil. And again, when I was talking to him at that time, it was still above $10 a barrel, way above $10 a barrel. And he was talking about the fact that he thinks that Texas, the state of Texas needs to cap production in the state, because it's time that the US did something in order to try to buoy the price of oil.

Do you think that's a good idea? And how much impact will that have on the broader oil market?

TOM KLOZA: Well, I do think that the consumer will benefit, and the planet will actually benefit from higher oil prices. I mean, at these numbers, there is absolutely no incentive to use less fossil fuels, or to gravitate to cars that have less of a carbon footprint. But it's going to take a while. I'm not-- or I am very much averse to the idea of cartels, and sort of price fixing, or fixing production.

I think it's more Darwinian than that. I think these numbers are the numbers that are going to result in a lot of shut ins in North America, but around the world-- really on every continent that has oil, which is every continent but Antarctica.

SEANA SMITH: Tom, what does this mean for geopolitics? How does this complicate things, when we have the price of crude flirting with negative territory?

TOM KLOZA: Well, you're talking about a lot of very well-heeled countries that are certainly not going to be well-heeled, and it's going to hurt their economies. Any oil-producing country-- Canada, even the United States, this is going to hurt if prices are so low. And it would be nice if there was some sort of a grand agreement to transition to a lower-carbon footprint because of this. But I don't think that's in the cards for this year, at least.

SEANA SMITH: Tom, if you were to guess how long oil would be in negative territory for, or really just staying below $1 a barrel, what would your prediction be at this point?

TOM KLOZA: I'd say we might-- we're having a cup of coffee with it right now, where we went negative. And it may occur tomorrow, since this is the last day of the contract. But it's a little bit more about the internals of the market, and all of the longs that got trapped in paper. Unless they were actually in the business, they could not take delivery of WTI and find a place to store that.

We think that there'll be all sorts of innovative ways to store oil that come up. In the middle third of this 2020, we'll get a little bit more stable. And by the end of the year, global demand will probably be much closer to global production. And oil will start to rebalance again.

But this is a real, real tough April and May for anyone in the oil supply area, whether it be at the wellhead, the refinery, or even at the pump.

SEANA SMITH: And Tom, and as we were just talking, we saw the price of oil go negative, falling all the way to negative $1.43 a barrel. So something we'll continue to keep an eye on here. Tom Kloza, thanks so much for joining us this afternoon.

Thanks