Negative US oil price is not end of the world

Note that only the WTI May contract has plummeted to negative levels – prices for June onwards, as well as the entire Brent curve, are still trading firmly positive.

KUALA LUMPUR: The unprecedent plunge in West Texas Intermediate crude oil for May delivery which tumbled to zero US$, does not mean the end of the world but it does remains a risk, OCBC Bank Research says.

OCBC Bank’s global treasury research & strategy economist, Howie Lee said on Tuesday the negative prices for May are not reflective of the entire state of the market as June futures have rebounded.

“It does appear that when the June expiry rolls around, a similar selloff - and maybe negative prices – would happen again. April’s experience, however, may lead physical buyers to attempt their rollover even earlier instead of waiting till the last 48 hours, ” he said in a report.

However, Lee pointed out that as long as demand remains weak and buyers cannot find storage space, prices will remain heavily suppressed.

“The negative oil prices have added more doom and gloom to inflation expectations. 10Y UST breakevens traded below 1%, while that of 1Y traded below -2% for the first time since 1 April (just before Opec+ met).

“We think that the risk-off spillover to other asset markets might be limited given that the negative prices only occurred on the May contract and it was done on very thin trading volumes. Nonetheless, it remains a dampener for risk sentiment at present, ” he said.

To recap, WTI for May delivery closed at -$37.63/bbl yesterday. It started the day at $17.73/bbl and touched an intraday low of -$40.32/bbl. At time of writing, the same contract has now rebounded back to $0.60/bbl.

Lee said it is not the end of the world, and the negative prices are not reflective of the entire state of the market.

Note that only the WTI May contract has plummeted to negative levels – prices for June onwards, as well as the entire Brent curve, are still trading firmly positive.

“Lack of storage is highly blamed here. The May futures are set to expire today (April 21), meaning that long positions are obliged to take physical delivery if one holds an open long position by the end of today’s trading session.

“Storage in the US, it seems, are close to full capacity as inventories are brimming from the coronavirus-induced demand slack.

“The lack of storage means if a refiner is handed the physical cargo, it is unable to find a warehouse to lodge its inventory. The inability to store means it matters little that a refiner had earlier bought crude oil at the low $20s – if they cannot find a space to store the oil, their purchase is as good as moot, ” he added.

Lee said physical buyers hence rolled over their long positions on May to June and beyond, in the hope of kicking the storage problem down the road.

Rolling over their long positions means selling their longs on May and initiating new longs on June and beyond.

The selling of May by physical buyers would also naturally encourage speculators and algo traders on board, which in turn exacerbated the selloff.

Even if buyers were able to locate storage, it would be relatively expensive by now as space runs out.

Given the demand slack from the coronavirus, few physical buyers are willing to pay that kind of storage costs in the environment for carry trade.

On whether it will happen again, he said “I will not bet against it”.

The lack of storage/ expensive storage is unlikely to be resolved unless demand either improves, or the US cuts its output.

The timeline for the US reopening its economy remains an enigma, although a conservative bet would be from July onwards.

At the same time, the US is unwilling to reduce output via centralised planning as that goes against capitalism ideals, Lee pointed out.

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WTI , OCBC Bank Research , Howie Lee , delivery , storage


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