Seven questions about negative oil prices


While Ukrainians rested after the celebration of Easter, the world collapsed in the oil markets. First, on Black Monday, oil collapsed to zero, and then buyers of American oil were paid extra for taking it. At the end of Monday’s bidding, almost $ 37 was required to sell a barrel of oil. You say that this does not happen? Can the seller pay extra to the buyer for taking the goods from the store? But, as the current global financial crisis shows, not even such miracles are possible. Some citizens even wondered – how can I buy oil so that I pay extra for it? But this is the catch: investors who are not dealing with oil and are stuck with futures contracts on hand in conditions where oil has nowhere to go, just became the main victims of the collapse. But the owners of oil terminals, on the contrary, won.

Why did oil buyers pay extra?

In order for an ordinary person to understand what happened, we will conduct a small educational program. There are several main types of oil in the world with which oil refineries work. In the USA, West Texas Intermediate is most often physically traded in WTI crude oil, Brent crude is more popular in Europe, Arab countries sell Dubai Crude and Russia Urals. These varieties differ in composition – sulfur content, density and other parameters important in production. And each refinery specializes in one type of oil. Of course, you can convert to a new variety, but it will take more than one day, and it will cost a lot. Therefore, even if WTI oil fell to zero for a short period, no one will refit the refinery specializing in Brent raw materials – until you finish,

Now let’s see what happened on the stock market. They sell securities there. One of them is futures (that is, future) contracts for the supply of oil. For example, now you can buy December futures for WTI crude oil at $ 32 per barrel. Physically, you will not have oil in your hands – only a contract for its delivery to the buyer. In other words, traders assess the situation so that by the end of the year oil will be trading around this figure (32 dollars) and buying it now, you will earn a little. If, until that moment, an event occurs that pushes prices up, then you can sell these contracts more expensive and earn, if some force majeure happens, you will incur losses.

And such a force majeure actually occurred in March. Against the background of quarantine measures and falling oil demand, Russia has withdrawn from a deal to reduce production with OPEC countries, and Saudi Arabia has unleashed a price war. Arabs began to increase production, which, amid falling demand, pushed prices down. As a result, oil fell in price to $ 20-25 per barrel.

Russia admitted losing in this war and eventually sat down at the negotiating table with OPEC countries, agreeing to record production cuts. But this will happen only in May. That is, now oil is extracted even more than before quarantine. And it is consumed, according to various estimates, by 15-20% less. All this time the surplus was poured into the oil storages, and at some point, they were filled up or became close to this.

So, by Monday, April 20, we had on the one hand almost full storage facilities, and on the other, investors who once bought futures contracts for the supply of oil in May. And it turned out that there are fewer free oil storage facilities than oil that will be produced in May. And on Monday, the time has come for the so-called expiration of contracts.

“Futures is a contract for the delivery of goods at a certain time in the future,” said Alpari analyst Maxim Parkhomenko in Ukraine. – If we are talking about WTI brand oil, the contract for delivery in May was traded. Expiration is the expiration date of this contract, after which the registry is closed and the parties to the delivery of goods are determined.

That is, it was necessary to close contracts not virtually, but physically – to look for where to drain excess oil. In this situation, the owners of free oil storage facilities decided to make money – they began to take money from oil suppliers for simply taking it away. In addition, the price became negative due to another exchange instrument.

– Due to the fact that June futures are trading more expensive as the day draws to a close and the price of May futures decreases, the premium that had to be paid to traders to extend their contract and not accept delivery increased, “explained KP Ukraine, an analyst at the Center for Exchange Technologies Maxim Oryshchak. – That’s why we saw -40 dollars for WTI oil.

Could a simple person pick up oil at a surcharge?

On commodity exchanges do not trade volumes that are understandable to ordinary citizens. Neither the canister nor even the railway tank is in use here. The volume of one contract starts from a thousand barrels. But this is a minimal contract. More often, dozens, hundreds and even millions of barrels are traded on the exchange. For understanding, the daily rate of oil consumption in the world is about 100 million barrels.

Therefore, when talking about the price of oil on the exchange, you need to understand what are the conditions for its supply, where and who will be able to pick it up.

“All contracts are tied to a specific hub, often these are oil storage facilities in a certain part of the world,” says Maxim Parkhomenko. – If we return to our contract, then this is a contract for delivery in May, in storage at Cushing (Oklahoma, USA). In other words, this is a certain amount of oil in storage facilities that will be available in May, and not barrels or tanks that will be delivered under the house.

That is, in order to capitalize on such an unprecedented drop in oil prices, it is necessary to have not only the infrastructure for its storage but also the means of delivery.

Why do manufacturers work in red?

In a situation where there is nowhere to store oil and producers have to pay extra to those who have an oil storage to pick it up, isn’t it easier to just stop production?

“Deposits are not a crane that can be closed,” continues Maxim Parkhomenko. – The oil comes from there fountain day and night or pumps. You can limit the pace of production. But stopping this process will be possible only by filling the well with concrete. Based on this, it is easier to pay extra or, conditionally, to pour oil than to stop production.

True, no one will allow pouring oil in countries such as the United States. The fines for environmental pollution will be more than the surcharge for the purchase. All this leads to the fact that everything that is possible is filled with oil.

“The oil storage facilities on land are full, and the excess is stored on idle large-capacity tankers,” explains Maxim Oryshchak. “Oil refineries are starting to shut down because no one needs the fuel they produce.” It is precisely because of the fall in demand for physical oil in American markets that the suppliers of “black gold” began to pay extra to customers for the export of oil from their crowded storage facilities.

Why do different varieties cost different?

In the beginning, we talked about the fact that there are several main types of oil, and each of the plants works with its own. Therefore, an excess of WTI crude oil did not practically affect the price of the Brent brand. In addition, experts say that the rules for trading different types of oil are different. And with WTI, this very expiration played a cruel joke.

“The bottom line is that in reality, live trading in these futures closes a few days before expiration,” says Maxim Parkhomenko. – In recent days there is no possibility to conduct operations with this contract. This contract could be bought or sold on Friday, after which the broker closes the opportunity to trade and closes the position. In fact, the holders of this contract have only the obligation to accept this product. At the same time, Brent is trading at a standard rhythm. Due to this, there were no such situations.

That is, in fact, there were not too many such deals, and physical oil is still worth its $ 18-20 per barrel.

“You also need to understand that there are different types of prices – there are spot prices (at the moment, – ed.), And there are futures,” adds Maxim Oryshchak, colleague. – Usually, the spot price is discussed on TV, that is, the price at which it is actually possible to buy a barrel of oil now, and not in the future (according to the futures). Information is shown to the population that can make it possible to understand the actual cost of energy in the world, but not provide a guideline for the dynamics of gas prices in the country, and, as a result, inflation.

According to him, when we see that crude oil futures can trade below $ 0.00, this means an illiquid futures contract, and not a basic spot contract, according to which someone ships oil to the plant.

How long will the period of low oil prices last?

Despite the fact that the negative prices for American oil did not last long and not for everyone, this event pulled down other grades of oil. The Russian Urals fell to negative values ​​for the first time in its history. Brent crude oil futures also fell from $ 25 to $ 19 per barrel.

True, experts say that the period of low prices will end as soon as countries begin to quarantine.

“This will be an extremely short period – in May prices will go up,” says Maxim Parkhomenko. – After the opening of the economy, oil consumption will also go up.

But if quarantine measures last, then prices will remain low for quite some time.

“The cost of oil will depend on the rate of spread of the coronavirus, the impact of this event on the world economy and the demand for oil,” says Maxim Oryshchak. -If consumption will remain low (plants will not work, people will not drive cars, etc.), then oil prices will be low for a long time, since there will be nobody to buy it.

Is it beneficial to Ukraine?

Well, in the end, let’s try to answer the question – are low prices favorable to our country? Some experts are frightened by the fact that, following the oil, Ukrainian export goods, in particular, iron ore, will become cheaper. Yes, this can happen, as metals are also bought by countries that previously sold oil, among others. On the other hand, agricultural exports, and today they are much more important in the Ukrainian trade balance, are much less dependent on oil prices. The planet’s population is growing, and people didn’t eat less because of the crisis.

“The low price is unprofitable only for oil producers, which we do not have,” says Maxim Parkhomenko. – In this regard, it is beneficial for us.

According to Maxim Oryshchak, for Ukraine, such a dynamics in oil prices does not have a direct effect, since the economy is not so much dependent on energy resources, as, for example, the Russian one. In the export structure, as always, the leading positions are occupied by ferrous metals and grain crops, therefore, according to him, one should not focus on the cost of a barrel.

As for the global economy, oil is an indicator that shows the depth of the failure of the financial system in the pit of the crisis.

“There is no economic activity – there is no demand for oil,” says Maxim Oryshchak. – There is no demand for oil, the economy of energy-dependent countries will suffer. The global economy, the leaders/drivers of which are the USA and China, will decline.

At the same time, according to Maxim Parkhomenko, there is a positive factor in low prices – now many governments are printing money to stimulate the economy. In the future, this may lead to higher inflation, and low energy prices, on the contrary, can contain it and level the negative consequences of the printing press.

Can Ukraine make money on oil storage

Against the background of the fact that world oil storage facilities are almost completely full, Ukraine is pondering how to make money on it. This proposal was made by the Executive Director of Naftogaz Yuri Vitrenko.

“In Ukraine, there is a huge oil transportation system where you can store oil, one working plant (Kremenchug) with significant storage tanks, as well as many oil refineries that have been shut down for a long time, but which at least had such tanks,” Vitrenko wrote in Facebook He added that the oil storage business is the most profitable right now.

However, experts say that from a geographical point of view, Ukraine is of little interest to world oil refiners.

“Nobody will load oil here,” energy expert Dmytro Marunych commented on “KP” in Ukraine “Twice passing the Bosphorus and sailing through the Black Sea is not a good idea, so if the oil is brought here, it will stay here. " It will be for internal use. True, the storage volumes are not the largest. The state-owned Ukrtransnafta has storage facilities of about 1 million cubic meters. And this company, having taken advantage of low prices, has already purchased about 160 thousand tons. In principle, this is a good idea – s to buy oil while it’s cheap, especially since there is talk about creating a strategic stock of oil and oil products, but there’s a question – who will pay for all this? After all, you need to allocate money for the purchase and storage of raw materials, and you can take them only on the market end-user.

Source: kp.ua

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