Usually “zero” is presumed to be rock bottom when it comes to the value of commodities traded on the open market.

But observers learned last week that when it comes to the current status of the oil industry, market losses may be bottomless.

Prices dipped as low as negative $40 per barrel last Monday when an oil glut and worldwide demand dip collided to leave traders faced with either paying outrageous storage fees or paying someone else to take the oil off their hands.

“A negative number is a confluence of physical barrel meeting up on a certain day with a financial barrel,” Steve Campbell, Ovintiv’s senior vice president of investor relations told the Times & Free Press.

“Well over half the oil trading is people buying and selling contracts who never actually see the oil itself.

“But when demand bottomed out and storage when contract dates were rapidly began filling up due to expire, investors either had to have those barrels delivered to their doorstep or pay to get out of the contract.”

city known as the pipeline Cushing, the Oklahoma crossroads of the world, is a major storage site for crude before it is sent on to refineries.

But with worldwide demand at an all-time low due to cornavirus-related industry shutdowns and been landing in Cushing travel restrictions, oil has with nowhere else to go, rapidly filling up storage facilities.

“The low oil price was started by Saudi Arabia a disagreement about oil and Russia getting into production cuts. So they flooded the market, increasing supply,” Steve Altman of Kingfisher’s Brown & Borelli Oil Co., said.

“Then the coronavirus hits and drives the demand down.

“Anyone with any basic knowledge of economics knows that high supply and low demand equals a price drop.

“In this case, the oversupply was huge, 30% over demand, so the price drop was huge.”

The impact on an already struggling oil industry has been powerful, with cutbacks and layoffs in the short-term and the looming prospects of bankruptcies and business closures in the future.

“Obviously, I don’t like the current oil price,” Altman said. “It is bad for me, bad for Kingfisher, bad for the state of Oklahoma and bad for the country. Also bad for the whole world,” Altman said.

“Needless to say, oil companies will not be able to survive on these prices. Numerous companies will go out of business.

“The ripple effect through the economy will be devastating.”

By Friday, the price had rebounded back into the black (West Texas Intermediate Crude: $17.27/barrel) but Altman said price volatility will continue until supply and demand level out once more.

“For the next few months, that last trading day for the futures contracts will be making a lot of people nervous as the price may again be subject to these wild swings,” he said.

Some analysts have predicted prices as low as negative $100 per barrel next month before the market levels out again, but Ovintiv’s Campbell believes investor caution may prevent a result that severe.

Altman noted that Saudi Arabia and Russia can increase or decrease their oil production at will “ because the government owns the production.”

“In the U.S., the oil is owned by private citizens – small oil companies and major oil corporations. The federal government lacks the authority to make these companies shut in their production,” Altman said.

States like Oklahoma and Texas do have the authority to control production within their state and the Texas Railroad Commission (the entity which regulates that state’s oil industry) is considering such an action in a system called “proration.”

“The lion share of companies our size are against proration,” Campbell said. “We think that companies are doing the right thing today by shutting in and we don’t need government intervention to force that to occur.

“We think companies are taking the right and measured steps and we’d like to have the choice of where we shut in production.”

In Oklahoma, Brown & Borelli was a part of an action before the Oklahoma Corporaton Commission that resulted in an emergency order last week allowing companies to shut in wells voluntarily without losing leases held by production.

“For companies with wells that do not have enough storage, this is a good measure,” Altman said.

“If they were required to continue producing, they could end up ‘selling’ oil for a negative dollar figure. Imagine being a royalty owner and getting a bill instead of a check from the oil purchaser for oil sold?”

Altman said that having the ability to shut in wells without placing leases at risk impact natural gas as well as oil prices.

“A side benefit will be for natural gas. Most of the wells in Oklahoma that make oil also make natural gas. So shutting in a well to reduce the supply of oil will also reduce the supply of natural gas,” he said. “We all know that the supply of natural gas is too high, hence the low price. Maybe a drop in supply will also help the natural gas price to rebound a little.”

However, Altman also noted a downside to the process.

“A risk for the oil producers is the well itself. There are times when shutting in a well will damage the well resulting in reduced production (or no production) when the well is reopened,” he said. “ This does not happen often, but I have seen it before.

“There’s no real good way to predict if this will or will not happen on a given well.”

Campbell provided some good news from Ovintiv (formerly Encana, which purchased Newfield Exploration’s assets in the STACK play.)

Although Ovintiv has reduced production significantly (from 24 rigs across all its production fields to a possibility of “just seven rigs by the time this is all over”), Campbell said the company remains committed to the Anadarko basin in Oklahoma.

“The assumption behind our purchase of Newfield was that Ovintiv could come in and dramatically lower well costs and we’ve done that by about $2.5 million,” he said. “Those efficiencies really changed the landscape of the Anadarko Basin and I think it will be an asset that will return in value.

“It’s still very competitive with the Permian Basin and it’s just as important to the story as it was a year ago, we just have to work through some things.”

Ovintiv also has benefit ed from hedging its production by selling it forward at a price of $42 per barrel.

“Even when we see negative prices on the screen, we still get the benefit of our hedge revenue coming in.”

As a result, Ovintiv has avoided layoffs in the current downturn.

“From people standpoint, important to note haven’t had any layoffs or reduction in staff,” he said. “To date we’ve been able to preserve people, sometimes by shifting people into different roles.”

Neither Campbell or Altman could predict when supply and demand might again level out in the oilfield, largely due to the unknown factor of the duration of the worldwide coronavirus shutdown.

“The bottom line is this – consumption has to increase before the price will come back. We cannot shut in enough production to get the supply and demand equal,” Altman said. “We have to increase demand. We have to open up the country.”

“Eventually, the supply and demand will level out, the price will go up, but the oil field in the U.S. will be damaged and we will once again be reliant on foreign oil,” Altman added. “For the original oversupply caused by the Saudis and the Russians, maybe that was the real end game – to damage our domestic producers and reduce domestic production.

“In the late 1990’s, that was the end game for Venezuela when they flooded the market and caused U.S. domestic production to fall by 2 million barrels per day.

“It worked then, will it work again?”