THE risk-off spillover to other asset markets following the fall in oil benchmark West Texas Intermediate (WTI) may be limited as it had only affected the May contract, which was based on very thin trading volumes.
However, as long as demand remains weak and buyers cannot find storage space, prices would remain heavily suppressed, said OCBC Treasury Research economist Howie Lee.
“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,” he said in a note today.
Lee attributed the decline in WTI May delivery price to lack of storage.
“The May futures are set to expire today, 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 United States is close to full capacity as inventories are brimming from the coronavirus-induced demand slack,” he said.
As such, if a refiner is handed the physical cargo, it would be 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 it cannot find a space to store the oil, its purchase is as good as moot,” added Lee.
Even if buyers were able to locate storage, it would be relatively expensive by now due to limited space, and given the demand slack due to the pandemic, few physical buyers would be willing to pay that kind of storage costs, he said.
“Will this happen again? 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,” said Lee. — April 21, 2020, Bernama
