Barrel with a minus: how the oil market
came to negative quotes
 |
Barrel with a minus how the oil market came to negative quotes |
“Paper” oil prices went negative, but the problem is quite real. Companies are willing to pay buyers to unload oil storage facilities, if only they would not have to stop production due to lack of storage space
It seemed that 2020 could no longer bring new surprises in the oil market - after price wars amid a record drop in demand and US participation in the new OPEC + deal. However, no one expected what happened on Black Monday, April 20: for the first time in the history of the market, the Nymex WTI CMA futures contract went down below zero, falling within one day by almost $ 60 to the final mark of minus $ 37.63 per barrel. Until recently, the oil exchange could not even register negative values, and now the news of such a drop in quotations has caused panic throughout the world.
Paper panic
However, what really happened and what will be the real consequences for sellers and buyers of oil? The reason for the price collapse lies in the lack of storage capacity in the central United States, especially in the vicinity of the main hub for oil storage in Cushing, Oklahoma. By a sad coincidence, the underlying American futures Nymex WTI is tied to Cushing, where the volume of stored oil has been growing for four consecutive weeks. The capacity of the tank farm there reaches 80 million barrels, and about 60 million are already pumped, and if the current trend continues, then by the second decade of May key storage facilities for the US oil infrastructure will be full.
It should be noted right away that the cost of physically supplied oil did not fall minus, since it is determined in other ways, only “paper” oil, that is, a financial instrument that ensures real trade, has slipped into the negative zone. In fact, the US oil market was crippled by the unwillingness of players to hold the May futures contract WTI CMA because of fears of being in the role of losers, for whom there will no longer be any storage space.
The problem was aggravated by the fact that, in contrast to European markets, WTI CMA paper trading is tied to the real one, that is, a long position in May futures implies the physical transfer of the traded lot. Most major players replaced the position at a later date, the so-called roll forward, in early April. However, a number of financial players decided to wait until the end (the May futures trading closed on April 21) in the hope of catching luck at the last moment. And when it didn’t work out, a panic started, which resulted in negative prices.
By the way, for the first time this happened on March 31, when the Wyoming Asphalt Sour grade has gone and remains there to this day. However, due to the small volumes of production of this heavy and sour crude oil, the market did not attach much importance to the event, although the reason for the collapse of a little-known grade from Wyoming and the main US paper benchmark is the same: oil companies are willing to pay buyers to unload overflowing oil storage facilities if they do not have to stop production due to lack of free storage capacity.
It should be noted right away that the cost of physically supplied oil did not fall minus, since it is determined in other ways, only “paper” oil, that is, a financial instrument that ensures real trade, has slipped into the negative zone. In fact, the US oil market was crippled by the unwillingness of players to hold the May futures contract WTI CMA because of fears of being in the role of losers, for whom there will no longer be any storage space.
The problem was aggravated by the fact that, in contrast to European markets, WTI CMA paper trading is tied to the real one, that is, a long position in May futures implies the physical transfer of the traded lot. Most major players replaced the position at a later date, the so-called roll forward, in early April. However, a number of financial players decided to wait until the end (the May futures trading closed on April 21) in the hope of catching luck at the last moment. And when it didn’t work out, a panic started, which resulted in negative prices.
By the way, for the first time this happened on March 31, when the Wyoming Asphalt Sour grade has gone and remains there to this day. However, due to the small volumes of production of this heavy and sour crude oil, the market did not attach much importance to the event, although the reason for the collapse of a little-known grade from Wyoming and the main US paper benchmark is the same: oil companies are willing to pay buyers to unload overflowing oil storage facilities if they do not have to stop production due to lack of free storage capacity.
Emergency measures
There is reason to believe that such a massive collapse, for example with the June futures, will not happen again in the near future. It will help to curtail production in those regions and oil basins that are most at risk of overstocking. Currently, about 70% of announced plans to reduce production fall on the Bakken oil and gas basin in the central part of the United States, on the border with Canada, only Continental Resources intends to cut production by 238 thousand barrels per day since April 2020.
Most American majors have already announced a reduction in capital costs for this year by an average of 30%. Apparently, production volumes will continue to decline either unilaterally or by decision of the regulator - the Texas Railway Commission. In addition, the Donald Trump administration has promised to provide up to 23 million barrels of capacity in the storage of state strategic reserves and expressed readiness
subsidize companies that are willing to suspend production until demand begins to recover. The combination of declining production, government action and the bitter experience of Black Monday may prevent further experiments with negative prices.
Most American majors have already announced a reduction in capital costs for this year by an average of 30%. Apparently, production volumes will continue to decline either unilaterally or by decision of the regulator - the Texas Railway Commission. In addition, the Donald Trump administration has promised to provide up to 23 million barrels of capacity in the storage of state strategic reserves and expressed readiness
subsidize companies that are willing to suspend production until demand begins to recover. The combination of declining production, government action and the bitter experience of Black Monday may prevent further experiments with negative prices.
Findings for exporters
The possibility of a repetition of such events on European exchanges is being actively discussed. But this is hardly possible. First of all, it should be noted that trading in the most important Brent variety for the world market is arranged differently. Brent paper trading is based on non-deliverable financial instruments, that is, unlike WTI, the European benchmark does not imply a physical transfer of oil, therefore it is easier to transfer positions to the next month. Secondly, North Sea Brent and all its components (Forties, Oseberg, Ekofisk and Troll) are focused on coastal infrastructure, the probability of “clogging" which before loading oil into tankers is significantly lower than in the case of Cushing. Nevertheless, the threat of a fall in the Brent benchmark grade below $ 15 per barrel remains real.
The precedent with negative US prices is a powerful signal to OPEC + countries. An agreement signed with such labor to reduce production by 9.7 million barrels per day is not able to balance the catastrophic drop in demand unfolding before our eyes, which, according to analysts, will only reach 28-30 million barrels per day in April. It was not necessary to cut back production from May 1, but much earlier, and much stronger than anticipated. The need to take such harsh measures will lead to even greater confrontation within the OPEC + framework; the states that depend on oil revenues and do not have sufficient financial reserves to cover current budgetary needs may become opponents of the reduction.
Separately, mention should be made of Russia, where the oil infrastructure is somewhat similar to the American one. Russian oil industry workers face similar problems: the vast majority of fields are concentrated away from ports and even processing centers. The availability of sufficient capacity for oil storage will play a key role in how successfully Russia will cope with the demand crisis in the next few months. But the authorities should not lose sight of the fact that, unlike American shale deposits, freezing production, for example in Western Siberia, will then require significantly more time and money to restart.
The precedent with negative US prices is a powerful signal to OPEC + countries. An agreement signed with such labor to reduce production by 9.7 million barrels per day is not able to balance the catastrophic drop in demand unfolding before our eyes, which, according to analysts, will only reach 28-30 million barrels per day in April. It was not necessary to cut back production from May 1, but much earlier, and much stronger than anticipated. The need to take such harsh measures will lead to even greater confrontation within the OPEC + framework; the states that depend on oil revenues and do not have sufficient financial reserves to cover current budgetary needs may become opponents of the reduction.
Separately, mention should be made of Russia, where the oil infrastructure is somewhat similar to the American one. Russian oil industry workers face similar problems: the vast majority of fields are concentrated away from ports and even processing centers. The availability of sufficient capacity for oil storage will play a key role in how successfully Russia will cope with the demand crisis in the next few months. But the authorities should not lose sight of the fact that, unlike American shale deposits, freezing production, for example in Western Siberia, will then require significantly more time and money to restart.