KUALA LUMPUR (April 21): The overnight plunge in crude oil prices is not the end of the world, and the negative prices are not reflective of the entire state of the market, said OCBC Treasury Research.
Reuters said US West Texas Intermediate (WTI) crude for May delivery was up US$39.00 in thin trade at US$1.37 a barrel by 0356 GMT after settling down at a discount of US$37.63 a barrel in the previous session.
The May contract expires on Tuesday and the more-active June contract rose 96 cents, or 4.7%, to US$21.39 a barrel, it said.
In a note titled “Understanding negative WTI prices”, OCBC Treasury economist Howie Lee said only the WTI May contract had plummeted to negative levels, explaining that prices for June onwards, as well as the entire Brent curve, are still trading firmly positive.
Lee said the likely cause of the fall in the price was lack of storage.
“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,” he said.
He added that the lack of storage meant 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 US$20s — if they cannot find a space to store the oil, their purchase is as good as moot,” he said.
Lee said 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,” he said.
On whether this would happen again, Lee said he will not bet against it.
He said the lack of storage, and expensive storage are 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,” he said.
However, he said 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.
“But the core idea remains — as long as demand remains weak and buyers cannot find storage space, prices will remain heavily suppressed,” he said.