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As oil sinks, some companies float idea of 'zero clause' in trades

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·3 min read
FILE PHOTO: The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County
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By Ron Bousso, Alex Lawler and Devika Krishna Kumar

LONDON/NEW YORK (Reuters) - After the worst quarter for oil prices in history, some oil producers have begun to include protection in their contracts to avoid being forced to pay buyers for the oil they pump if prices slide below $0 a barrel.

Crude prices in key physical markets - including the United States, Canada, Mexico and Europe - have fallen through $10 a barrel, far below comparable futures prices, as demand slumps and storage fills. Those discounts could widen even further, making it possible that outright physical prices could fall below $0 per barrel.

Such occurrences are rare, though it has happened in other markets, such as West Texas natural gas markets, where spot prices dropped into negative territory in early March, forcing producers to pay to have others take their gas.

Oil prices have been hammered by the collapse in demand after the coronavirus outbreak and the sudden end of an OPEC-led supply reduction pact. Oil benchmarks plunged more than 65% in the first quarter.

Futures prices rebounded on Thursday after U.S. President Donald Trump said Russia and Saudi Arabia could come together to support markets. However, if global demand falls by 30 million barrels per day (bpd), prices could still fall, and there could be bigger discounts for barrels produced in more isolated locales.

Major oil companies and those involved in U.S. shale have started introducing a zero clause, to avoid having to pay buyers to take oil away, six sources said.

"If the purchase price to be paid by Buyer to Seller for any crude oil delivered is less than zero dollars, such purchase price shall be deemed to be zero dollars," reads one such clause, one of the six sources said.

Exxon Mobil Corp introduced such clauses into contracts a few days ago for new deals, according to two counterparties to Exxon's trades who have seen the contracts. Exxon declined to comment on commercial matters.

"The majors have brought this up as a discussion," said one of the trade sources familiar with the talks, adding the price was a matter for the parties to agree upon. "It could be somewhere between $5 and zero."

Others said it could be difficult to add clauses as it would affect trading relationships. "We are not doing it and are not accepting it when we purchase," one source at a U.S. shale producer said.

Three sources in the North American crude market said they were in discussions with legal teams on language around such clauses. One Canadian oil producer's notice to customers seen by Reuters put a floor price of one penny on trades.

Canadian heavy oil in Alberta traded $16.65 per barrel below WTI, or about $3.60 a barrel outright on Wednesday.

The physical Brent crude benchmark, known as dated Brent, dropped to a new record discount to Brent futures at about a $10 a barrel.

(Reporting by Ron Bousso and Alex Lawler in London, and Devika Krishna Kumar in New York; Additional reporting by Julia Payne and Ahmad Ghaddar in London and Olga Yagova in Moscow; Editing by David Gaffen and Matthew Lewis)