By Sonny Atumah
The downbeat demand for global oil is on. No one wants oil now. Refineries are not processing more crude. Manufacturing demand for crude is weak. The global oil stockpiles continue to build with caverns almost full to their brims. Supertankers or very large crude carriers heavily laden with 160 million barrels of crude like cargo cult in the Melanesian Islands brought by benevolent spirits are afloat with no buyers. The prices of the various grades of crude are falling and precipitously too. The global economy appears to be running with no engine. Yet there is a pilot, the Covid-19 pandemic, crashing demand. The global economic slowdown is becoming sharper by the day. All known theorems of controlling crude oil supply are almost exhausting. Global economies are in defiance of all known logic with recession resurrecting. The United States benchmark, West Texas Intermediate (WTI) for May crude oil spot price was down by US$55.90 on Monday, closing at US$-37.63 a barrel. It was the largest price drop for crude oil in history at 305.97 per cent, but it was also the first time that the WTI oil price slipped into negative territory.
Why did it happen? The scenarios analysts have painted are diverse including overproduction, storage problems and low prices that made traders and investors to become more apprehensive. The United States oil key storage hub and delivery point of the WTI contract in Cushing, Oklahoma, has been under pressure with a crude inventory of 55 million barrels owing to demand crash caused by the COVID-19 pandemic. With a supply glut, final buyers are difficult to find. Traders in desperation invoke the pass-the-parcel on oil game by paying others to take the oil that no one wants before Tuesday, May 21, the expiry date for May contracts. It meant they were willing to pay more money to anyone willing to take the oil off their hands. On Monday, a day before the WTI Crude May contract expired traders rushed the exit to avoid owning physical barrels of oil for delivery in May. The WTI contract for each coming month expires around the 20th day of the present month, varying on weekends and holidays. Buyers of these contracts must either sell these contracts for oil now or take physical delivery of the oil at the end of May.
Was it error in timing or dilemma as some analysts say? Reports quoting Bloomberg sources suggest that the United States Oil Fund, USO an Exchange Traded Fund, ETF, as at last week held 25 per cent of the outstanding May 2020 WTI oil futures contracts that would have ended by last Tuesday. As traders abandoned the May contract, the hope was for the June 2020 Futures contract. The June contract expires May 19. The meltdown spreads, the June 2020 futures again went down by 43 per cent closing at US$11.57 a barrel in New York on Tuesday, April 21. The price crash has spilt into the ETF market, with the USO, moving some of its WTI contracts into later months, according to a regulatory filing at the Securities and Exchange Commission. The USO ETF spread now has approximately 40 per cent of its portfolio in June crude oil futures contracts, 55 per cent in July crude oil futures and the remainder in August WTI crude oil futures. As long as oil prices plunge, USO prices would continue to fall. The USO is the biggest crude tracking fund. It deals in paper barrels and not with the physical delivery of oil. Futures contracts for crudes are regulated, liquid exchanges ahead, allowing oil producers, physical traders, refiners and others to lock in prices, buy, or sell options to manage their risks.
Normally refineries, airlines and vehicular movements would soak crude supplies. COVID-19 has kept about four billion people in lockdowns. With global travel near impossible, producers that have run out of storage capacity, pay traders to have all the excess supply stored offshore. Many asked whether the negatives would last long. It may last longer than necessary as tanks across the globe fill up. The American Petroleum Institute, API report showed that U.S. crude stockpiles rose by about 14 million barrels last week. The crisis reverberating across the oil industry has affected the Brent crude futures for June. The Brent benchmark, a global reference for nearly two-thirds of the world’s physical flows, plunged to US$13.24 a barrel on Tuesday; it is lowest since 1999, according to price reporting agency S&P Global Platts.
The three main grades used for worldwide pricing are WTI, Brent from the UK North Sea, and Dubai/Oman. Global oil collapse in demand is due to the coronavirus pandemic, combined with the price war between Saudi Arabia and Russia. Oil ministers from the OPEC+ held conference calls on Tuesday to discuss the collapse but yet to settle on new policy measures. The Texas Railroad Commission opted to put off a decision on whether to impose oil-production quotas. It means that key European and African crude streams, including Urals of Russia and Bonny Light of Nigeria, would now sell under US$10 a barrel, as they trade at a discount to the Brent benchmark.IEA Executive Director Fatih Birol has urged countries that recently decided to cut oil production to consider even deeper cuts. Is it finished for crude? It is not as bad as it seems. It is a matter of time.