Why are oil prices negative?<\/h2><\/div>As we discussed in our recent\u00a0Coronavirus<\/a>\u00a0article, there are a couple of things working together to tank the price of oil.\u00a0 The first is demand.\u00a0 With Coronavirus bringing the US economy to stand still, there is very little demand for oil.\u00a0\u00a0 Many people are working from home, not working, and not going anywhere outside of work.\u00a0\u00a0 Vacations have come to a stop so unless you\u2019re traveling for a necessary reason there simply aren\u2019t many people driving.\u00a0\u00a0 In addition,\u00a0US airlines have reduced flights by over 90%<\/a>.\u00a0 This is obviously not a situation unique to the United States.\u00a0 This is happening all over the world.\u00a0\u00a0 The demand for oil has simply been decimated.\u00a0 There is no demand for the oil coming out of the ground.<\/p>\nThe other major issue is supply.\u00a0 Over the years oil and gas operators in the United States have become experts at extracting oil and gas.\u00a0 This has led the US to flood the market with supply over time.\u00a0\u00a0 This is the primary reason we saw oil prices retreat from the over $100\/barrel prices we were seeing back in 2014 and before.\u00a0\u00a0 With the increase in supply the price has been driven down.<\/p>\n
What this has done is create a perfect storm.\u00a0 There is simply too much oil supply and very little demand to actually use the oil being produced.<\/p>\n<\/div>
The storage tanks are full<\/h2><\/div>One of the obvious questions is why not just store the oil and wait for prices to rise.\u00a0 The problem here is that\u00a0oil storage capacity\u00a0is full.\u00a0 Since there is no where to put the oil it must be sold.\u00a0 Individual producers do not have storage to handle the massive amount of supply coming out of the ground.\u00a0 This means they have no choice but to sell the oil.<\/p>\n<\/div>
How do negative prices work?<\/h2><\/div>The picture below shows the price of oil on 4\/20\/2020 near one of the lowest points.\u00a0 Oil was down to\u00a0negative\u00a0<\/strong>$36.90\/barrel.\u00a0 What this means is that if you must sell a barrel of oil\u00a0today,\u00a0<\/strong>you will have to pay $36.90 for someone to take that barrel of oil.\u00a0\u00a0 This is likely a one day \u201ctrading\u201d issue and does not mean we will have negative oil for the long term.\u00a0 However, what it does mean is that oil storage capacity is at or near capacity.\u00a0\u00a0\u00a0 Oil and gas companies will obviously not \u201csell\u201d oil for a loss in the long term.\u00a0 This means they have one choice\u2026.shut in wells.<\/strong>\u00a0\u00a0\u00a0 Once wells start getting shut in you will no longer be receiving oil and gas royalty checks.<\/p>\n<\/div><\/div><\/div><\/div><\/div><\/div>![\"Negative](\"https:\/\/www.usmineralexchange.com\/blog\/wp-content\/uploads\/2020\/04\/Negative-Oil-Prices-Impact-on-Royalty-Checks.png\" "\\"Negative")
<\/span><\/div><\/div><\/div><\/div><\/div><\/div>Royalty checks will drop substantially<\/h2><\/div>If you are a mineral owner who gets royalty checks that are mostly related to oil, you will see a substantial drop in your income.\u00a0\u00a0 As the the price of oil continues to drop you will see much lower royalty checks.\u00a0\u00a0 Negative oil and gas prices will have a negative effect on royalty checks.\u00a0\u00a0 At the beginning of 2020 oil prices were hovering around the $50\/barrel range.\u00a0\u00a0 With oil prices at $25 or less, it is very likely that royalty checks will be\u00a050% or lower\u00a0<\/strong>of what you were receiving in January 2020 (for production in late 2019).<\/p>\nWhile you may be getting substantially lower oil royalty checks, you might also start getting $0 if wells are shut in.\u00a0 The major problem is that there is simply too much oil, no demand to use it, and nowhere to put it!\u00a0 At some point, there won\u2019t be any option but to shut in wells and keep the oil in the ground.\u00a0 This means royalty checks will stop entirely.<\/p>\n<\/div>
Hedging may save royalty owners<\/h2><\/div>In the short term, the oil and gas operator may have hedged their production.\u00a0 Many larger\u00a0E&P companies<\/a>\u00a0hedge oil prices from 1 to 3 years out.\u00a0 If your company hedged prices at $50\/barrel, and they pass that hedge along to you, you may not see a material decline in royalty checks due to negative oil prices.\u00a0\u00a0 Keep a close eye on your royalty checks.\u00a0\u00a0 There is a \u201cProduct\u201d column typically located on the left side.\u00a0\u00a0 If your product code is \u201cO\u201d for oil, it will have a price listed.\u00a0\u00a0 Each month keep a close eye on what oil price they are paying you for.\u00a0\u00a0 They may be producing a similar volume of oil, but if the price drops substantially you will get less royalty income.<\/p>\n<\/div>
As we discussed in our recent\u00a0Coronavirus<\/a>\u00a0article, there are a couple of things working together to tank the price of oil.\u00a0 The first is demand.\u00a0 With Coronavirus bringing the US economy to stand still, there is very little demand for oil.\u00a0\u00a0 Many people are working from home, not working, and not going anywhere outside of work.\u00a0\u00a0 Vacations have come to a stop so unless you\u2019re traveling for a necessary reason there simply aren\u2019t many people driving.\u00a0\u00a0 In addition,\u00a0US airlines have reduced flights by over 90%<\/a>.\u00a0 This is obviously not a situation unique to the United States.\u00a0 This is happening all over the world.\u00a0\u00a0 The demand for oil has simply been decimated.\u00a0 There is no demand for the oil coming out of the ground.<\/p>\n The other major issue is supply.\u00a0 Over the years oil and gas operators in the United States have become experts at extracting oil and gas.\u00a0 This has led the US to flood the market with supply over time.\u00a0\u00a0 This is the primary reason we saw oil prices retreat from the over $100\/barrel prices we were seeing back in 2014 and before.\u00a0\u00a0 With the increase in supply the price has been driven down.<\/p>\n What this has done is create a perfect storm.\u00a0 There is simply too much oil supply and very little demand to actually use the oil being produced.<\/p>\n<\/div> One of the obvious questions is why not just store the oil and wait for prices to rise.\u00a0 The problem here is that\u00a0oil storage capacity\u00a0is full.\u00a0 Since there is no where to put the oil it must be sold.\u00a0 Individual producers do not have storage to handle the massive amount of supply coming out of the ground.\u00a0 This means they have no choice but to sell the oil.<\/p>\n<\/div> The picture below shows the price of oil on 4\/20\/2020 near one of the lowest points.\u00a0 Oil was down to\u00a0negative\u00a0<\/strong>$36.90\/barrel.\u00a0 What this means is that if you must sell a barrel of oil\u00a0today,\u00a0<\/strong>you will have to pay $36.90 for someone to take that barrel of oil.\u00a0\u00a0 This is likely a one day \u201ctrading\u201d issue and does not mean we will have negative oil for the long term.\u00a0 However, what it does mean is that oil storage capacity is at or near capacity.\u00a0\u00a0\u00a0 Oil and gas companies will obviously not \u201csell\u201d oil for a loss in the long term.\u00a0 This means they have one choice\u2026.shut in wells.<\/strong>\u00a0\u00a0\u00a0 Once wells start getting shut in you will no longer be receiving oil and gas royalty checks.<\/p>\n<\/div> If you are a mineral owner who gets royalty checks that are mostly related to oil, you will see a substantial drop in your income.\u00a0\u00a0 As the the price of oil continues to drop you will see much lower royalty checks.\u00a0\u00a0 Negative oil and gas prices will have a negative effect on royalty checks.\u00a0\u00a0 At the beginning of 2020 oil prices were hovering around the $50\/barrel range.\u00a0\u00a0 With oil prices at $25 or less, it is very likely that royalty checks will be\u00a050% or lower\u00a0<\/strong>of what you were receiving in January 2020 (for production in late 2019).<\/p>\n While you may be getting substantially lower oil royalty checks, you might also start getting $0 if wells are shut in.\u00a0 The major problem is that there is simply too much oil, no demand to use it, and nowhere to put it!\u00a0 At some point, there won\u2019t be any option but to shut in wells and keep the oil in the ground.\u00a0 This means royalty checks will stop entirely.<\/p>\n<\/div> In the short term, the oil and gas operator may have hedged their production.\u00a0 Many larger\u00a0E&P companies<\/a>\u00a0hedge oil prices from 1 to 3 years out.\u00a0 If your company hedged prices at $50\/barrel, and they pass that hedge along to you, you may not see a material decline in royalty checks due to negative oil prices.\u00a0\u00a0 Keep a close eye on your royalty checks.\u00a0\u00a0 There is a \u201cProduct\u201d column typically located on the left side.\u00a0\u00a0 If your product code is \u201cO\u201d for oil, it will have a price listed.\u00a0\u00a0 Each month keep a close eye on what oil price they are paying you for.\u00a0\u00a0 They may be producing a similar volume of oil, but if the price drops substantially you will get less royalty income.<\/p>\n<\/div>The storage tanks are full<\/h2><\/div>
How do negative prices work?<\/h2><\/div>
<\/span><\/div>Royalty checks will drop substantially<\/h2><\/div>
Hedging may save royalty owners<\/h2><\/div>