Negative oil prices could happen again: OCBC Treasury Research

PETALING JAYA: The overnight price collapse of West Texas Intermediate (WTI) which saw it close at -US$37.63 per barrel, is likely to happen again if the oil storage problem is not solved, according to a note by OCBC Treasury Research.

It pointed out that storage in the US seems close to full capacity as inventories are brimming from the coronavirus-induced demand slack.

“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 onwards.

“At the same time, the US is unwilling to reduce output via centralised planning as that goes against capitalism ideals,” it said.

On Monday, the price for WTI May contracts collapsed into negative territory, which was attributed to a lack of storage space.

OCBC economist Howie Lee explained that as the May futures expired on April 21, long positions are obliged to take physical delivery if they are still held open at the end of the day’s trading session. As such, physical buyers rolled over their long positions on May to June and beyond, in the hope of kicking the storage problem down the road.

“Rolling over their long positions means selling their longs on May and initiating new longs on June and beyond. The selling of May by physical buyers would also naturally encourage speculators and algo traders on board, which in turn exacerbated the selloff,” he said.

Following on from this, Lee said it does appear that when the June expiry rolls around, a similar selloff – and maybe negative prices – would happen again.

“As long as demand remains weak and buyers cannot find storage space, prices will remain heavily suppressed,” he said.

However, he said the risk-off spillover to other asset markets might be limited, given that the negative prices only occurred on the May contract and it was done on very thin trading volumes.

As long as demand remains weak and buyers cannot find storage space, oil prices will remain heavily suppressed, says OCBC economist. – REUTERS

source https://www.thesundaily.my/business/negative-oil-prices-could-happen-again-ocbc-treasury-research-CA2310150