No free oil for China after US benchmark WTI price fell below zero for first time ever, say analysts

Eric Ng
·5-min read

The brief plunge of a key US oil benchmark into unchartered negative territory on Monday was driven by a combination of short-term trading dynamics and US-specific logistics challenges amid sharply lower demand because of the coronavirus pandemic.

China, the world’s largest oil importer, where oil demand is recovering as manufacturing resumes, will benefit from lower prices, although stocking up on large quantities of oil costing little more than zero is not feasible due to limited storage capacity, analysts said.

“Chinese oil import has been flat year on year due to the impact of the pandemic,” said Sanford Bernstein senior analyst Neil Beveridge. “We estimate China to have added roughly 225 million barrels to its strategic reserve [in recent months], which we believe is already close to one billion barrels, or 100 days of imports. [We] question how much capacity is left.

“Anecdotal comments from China’s oil majors suggest that storage levels are extremely elevated in China.”

The West Texas Intermediate benchmark for May delivery closed at minus US$37.6 a barrel on Monday, a day ahead of the contract’s expiry, as the storage hub and delivery point of the contract in Cushing, Oklahoma is close to full capacity. The contract’s expiry forces all holders to accept physical delivery.

“Midstream players are now paying buyers to take oil volumes away as the physical storage limit will be reached,” said Norway-based consultancy Rystad Energy’s oil markets analyst Louise Dickson. “Pricey shut-ins or even bankruptcies could now be cheaper for some operators, instead of paying tens of dollars [per barrel] to get rid of what they produce.

“The remaining 21 million barrels of Cushing storage is almost certainly going to get filled up next month.”

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In Tuesday morning trading in Asia, the May contract rebounded to US$1.76 a barrel on the New York Mercantile Exchange in Singapore, while the June contract rose 6.9 per cent to US$21.83, Bloomberg reported.

The Brent benchmark, on which two thirds of internationally traded crude oil supplies are traded, gained 0.9 per cent to US$25.80 on the ICE Futures Europe exchange after falling 8.9 per cent on Monday.

“It is important to note that [the abnormal pricing] is only for the May contract, which expires today (April 21), while the June contract is still positive at around US$20, signalling that this is a very short-term issue, for now, said Yaw Yan Chong, director, oil research (Asia), at Refinitiv.

“It remains to be seen if the June contract will similarly fall into negative territory as it approaches expiry at the end of May.”

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Monday’s plunge into the negative of WTI was a “technical aberration”, according to David Chao, global market strategist, Asia Pacific excluding Japan at asset manager Invesco.

“[It] does not truly reflect what’s going on in the commodities world. The Brent crude contract is a better indicator of global oil prices,” he said.

The available global storage – excluding nations’ strategic reserves – of around one billion barrels could be filled up by the end of June unless there are additional supply cutbacks or demand can rebound in time, according to Stephen Innes, global chief market strategist at Axicorp, a Sydney-based foreign exchange platform.

Members of oil cartel Opec and their allies including Russia and Mexico agreed on April 12 to cut production by 9.7 million barrels a day next month and in June, as lockdowns imposed around the world to contain the coronavirus sapped 30 per of global oil demand this month.

But this is too little, too late, according to Beveridge, as the oil market is experiencing the biggest blow to demand since the Great Depression nine decades ago.

He expected the international pact to result in at most 6 million barrels per day of actual cuts, given “weak compliance”, while global oil demand could fall by 9.2 million barrels a day this year.

In this year’s second quarter, supply could exceed demand by 13 million barrels a day, which means 1.2 billion barrels of crude needs to be stored, he estimated.

As oil prices test multi-decade lows, Beveridge said the Chinese state-backed oil trio – PetroChina, Sinopec and CNOOC – will weather the downturn better than smaller international, independent players, of which the most indebted ones – many in the US – may go bankrupt.

Sinopec, which has the biggest refining and chemical operations, will particularly benefit from low-cost imported oil – feedstock for downstream products – and gradual resumption of manufacturing and services activity in China.

“The Chinese majors have strong balance sheets, but the big issue is that given Beijing’s desire for them to keep production up to enhance national energy security, how much they will be allowed to reduce project outlays and stem output from loss-making oilfields,” he said. “So far they have not announced their production plans for this year.”

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