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The Ontario Government has legislated that all non-essential businesses MUST BE closed BY 12:01 am on March 25. The health and safety of our employees, clients and our community is our top priority. To do our part in slowing the spread of COVID-19, our staff are working remotely until further notice.

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

As oil sinks, some companies float idea of 'zero clause' in trades
By Thomson Reuters 2 months ago 856 Views No comments

By Ron Bousso, Alex Lawler and Devika Krishna Kumar

LONDON/NEW YORK, April 3 (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)

About Sprott Money

Specializing in the sale of bullion, bullion storage and precious metals registered investments, there’s a reason Sprott Money is called “The Most Trusted Name in Precious Metals”.

Since 2008, our customers have trusted us to provide guidance, education, and superior customer service as we help build their holdings in precious metals—no matter the size of the portfolio. Chairman, Eric Sprott, and President, Larisa Sprott, are proud to head up one of the most well-known and reputable precious metal firms in North America. Learn more about Sprott Money.

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