Page 6 - AfrOil Week 16 2020

AfrOil COMMENTARY AfrOil
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The crash took place against the backdrop of a collapse in oil demand as the response to the coronavirus (COVID-19) pandemic led to a drop-off in travel and industrial activity. Reflecting a global trend, a number of US states imposed lockdowns of varying severity last month, sending fuel demand into freefall.
In response, and again in line with global trends, US refiners cut activity by 25-30%, according to investment bank Morgan Stan- ley. Combined with planned maintenance, this is estimated to have effectively cut US crude demand by around 4.5mn barrels per day (bpd) compared with normal levels.
This has led to a sharp rise in both crude and refined products going into storage. Morgan Stanley estimates that US gasoline storage uti- lisation has risen from 66% to 73% over the past four weeks – the highest level for any season over the past five years according to the bank. Crude storage utilisation at Cushing, the US hub where WTI is priced, has also surged, with stocks ris- ing by 10mn bpd between March 27 and April 10, according to the US Energy Information Administration (EIA).
Deadline approaching
These factors combined with the upcoming expiry of the May crude futures contract on April 21. Indeed, warnings had been sounded about looming storage capacity shortages since mid-March, when many lockdowns began, but the expiry of the May contract dramatically exacerbated the impact on prices.
As the deadline approached, traders that still had contracts for May delivery were increasingly struggling to find buyers as options for where to send the physical barrels dried up. What buyers remained insisted on being paid to take out the positions, sending the crude price crashing to unprecedented negative levels as the spot price of WTI converged with the May futures price, which typically happens as contracts expire.
“Today’s previously unimaginable record low reflects a massive physical supply surplus, tomorrow’s expiration of the May 2020 WTI contract, and the high cost of scarce crude oil storage capacity,” consultancy IHS Markit com- mented on April 20. The consultancy noted that the June contract, which was due to take over as the front month contract, settled at $20.43 per barrel on the same day, suggesting that oil was not expected to be worthless by the summer.
However, subsequent price movements do not demonstrate much confidence, and indeed IHS also warned that the negative pricing was an “ominous” sign.
“The fact that prices went this low at all reflects brutal market forces that will not disap- pear with the expiration of a single monthly con- tract,” commented IHS Markit’s vice-president and head of oil markets, Jim Burkhard.
Spilling over
While WTI is no longer negative, the value of the June contract has tumbled since April 20, and other benchmarks such as Brent are also
seeing downward pressure.
Brent was still trading above $25 per barrel
on April 20 despite losing 8.9%. As a Brent is a seaborne crude, it is less immediately vulnerable to storage issues and can be easily sent to areas of higher demand. Nonetheless, the interna- tional benchmark fell to levels not seen in over 20 years, dipping below $16 per barrel in Asian trade on April 22 before stabilising above $21 per barrel later in the day.
The WTI June contract had clawed its way back to above $14 per barrel on April 22 after US trading opened, but its value had almost halved the previous day, and there are mounting con- cerns about what the coming weeks will bring.
“The realisation of negative prices has clearly spooked the market, with worries that we could see the same for the WTI June contract and pos- sibly even in the Brent market,” ING’s head of commodities strategy, Warren Patterson, was quoted by the Financial Times as saying.
What next?
The concern now is that time is running out until available storage capacity fills up. Mor- gan Stanley estimates that storage in Cushing is currently on a trajectory to fill in around three weeks, with all available US storage capacity fill- ing within about six weeks.
Consultancy Rystad Energy, for its part, anticipates that onshore storage could run out either in the first week of May, or – if all remain- ing storage with 100% utilisation is included – the end of May. The consultancy noted that its models suggest this to be the case even with OPEC+ cuts that will be implemented from May 1.
“Time to throw old perceptions of physical laws to the side and be prepared for more sur- prises in this broken oil market,” commented Rystad’s head of oil markets, Bjornar Tonhau- gen. “Prices can go to unprecedented low levels even for Brent as, unless there are further cuts announced, storage capacity will just not be enough.”
More supply cuts are undoubtedly looming as producers reel from this week’s oil price vol- atility so far. But Morgan Stanley has warned that the US supply cuts announced to date are only a fraction of the roughly 1.0-1.5mn bpd of reductions – equating to 8-12% of US supply – necessary in order to avoid “tank tops” in the second quarter.
Similar trends are playing out elsewhere in the world. Production cuts are coming, but not fast enough. ™
“ is that time is
The concern now
running out until available storage capacity fills up
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Week 16 22•April•2020