Should we be afraid of negative oil prices?

US, WASHINGTON (ORDO NEWS) — On Monday, April 20, investors again witnessed a historic event: for the first time in US history, light oil futures fell to a negative value. May contracts for light oil in the US completed trading, falling 171.7% to -13.1 dollars per barrel, and the percentage of one-day drop on the exchange amounted to more than 300% – with a minimum price of -40.32 dollars per barrel.

Prior to this, there have never been negative prices in the history of crude oil futures. This means that investors will receive cash for the physical supply of crude oil to Cushing, Oklahoma. Chris Midgley, head of the S&P Global Platts energy information analytics department, said Cushing is an inland city and the available crude oil storage tanks are likely to fill up within 3 weeks. Once filled, it will be physically more difficult to carry out crude oil futures contracts.

An analysis of CITIC Construction showed that the reason why the price of US oil fell to a negative value is mainly because the existing storage facilities will be completely full in the short term, and the May futures contract for crude oil, which expires on Tuesday, will soon will be submitted for execution. Due to the epidemic in most regions of the United States, a sale ban is still in effect. The only buyers of contract futures are those organizations that actually receive supplies, such as refineries or airlines, but the oil storage facilities in these organizations are full, which creates a lack of demand.

The US epidemic caused problems such as deterioration of basic infrastructure, transportation delays and logistics problems, and crude oil became difficult to export or store. Closing wells and halting production solely for economic reasons is risky, so production continues. If there is not enough storage capacity for the storage, or if the storage cost becomes too high, producers prefer to put up with negative oil prices and have to suffer losses, but allow customers to pick up the goods.

In addition, the epidemic situation in the United States is still very serious, economic activity has not resumed, demand for crude oil is still insufficient, and large oil companies have no strong desire to buy oil. Jeff Kilburg, founder and CEO of Chicago-based investment management company KKM Financial, noted that the price difference between May and June US crude futures is currently the largest in history. This is due to the fact that the May contract expires simultaneously with a sharp drop in oil prices.

Analysts at Morgan Stanley Investment Bank said in a research report that WTI futures fell to an unprecedented negative level due to the lack of market participants capable of storing oil in Cushing. The May futures contract for WTI crude oil expires after the close of trading on Tuesday, and contract holders may be forced to accept physical deliveries of oil at the Cushing Central Petroleum Storage in May. Crude oil futures market participants are eager to sell contracts before they expire, but those with a lack of tank capacity cannot make a purchase, as a result of which the price of oil has fallen to a minimum of -40 dollars per barrel.

Investors should not be overly pessimistic

Despite the fact that the oil price fell to a negative value in May, the current contract price for June is still in excess of $ 20. The price of the global standard, Brent crude oil, still stands at more than $ 25.

Currently, the market as a whole expects that the world level of crude oil reserves in the second quarter of 2020 may exceed 1 billion barrels by a peak of 4 billion barrels between 2015 and 2016, which is in line with the aggregate rate of the agreement to reduce 12 million barrels per day and may approach tank capacity limits. And even with an unprecedented reduction in production of 20 million barrels per day in the next few months, the crude oil market will be full or it will be very difficult to avoid such a risk.

Guo Chiayi, an analyst at Societe Generale Securities Services, believes that in the current environment, one should not be overly pessimistic about oil prices. Firstly, there really is a problem of bottlenecks in transportation, and secondly, in conditions of unlimited pressure on the price of fields, producers will also be extremely reluctant to close oil wells and adjust production, so crude oil reserves may not reach the storage limit. And even if the reservoir capacities of crude oil approach the limit, it should be noted that oil prices will reflect what is expected of them.

Everbright Securities Co Ltd analyst Zhao Find said the current market sentiment is not optimistic due to the double impact of supply and demand imbalances and oil pressure. A serious turning point in the dynamics of oil prices mainly depends on improving demand, and in the future more attention should be paid to the development of the epidemic situation, the schedule for the implementation of the plan to reduce production and the state of world storage.

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