The lack of storage or expensive storage is unlikely to be resolved unless demand improves or the US cuts its output levels

By SHAZNI ONG / Pic TMR

THE crash of the West Texas Intermediate (WTI) futures contract for May delivery to below zero, although not reflective of the entire state of the energy market, does highlight the risks for the sector, analysts observed.

The WTI’s May delivery contract fell sharply as traders soldout to avoid taking physical delivery as storage facilities are full, while demand has fallen due to the economic impact of Covid-19 shutdowns.

OCBC Bank global treasury research and strategy economist Howie Lee said while the WTI’s May contract price has plummeted to negative levels, the June contract was in the positive, trading at US$16 (RM70.24) a barrel at press time yesterday, despite coming under heavy selling pressure in yesterday’s trading action.

“It does appear that when the June expiry rolls around, a similar sell-off — and maybe negative prices — would happen again.

April’s experience, however, may lead physical buyers to attempt their rollover even earlier instead of waiting until the last 48 hours,” he said in a report yesterday.

Lee added that if demand remains weak and buyers cannot find storage space, prices will remain heavily suppressed.

The negative oil prices have added more doom and gloom to inflation expectations. The US Treasury 10-year field breakevens traded below 1%, while that of one year traded below -2% for the first time since April 1 (just before OPEC+ met).

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

“Nonetheless, it remains a dampener for risk sentiment at present,” he said.

He added that the lack of storage or expensive storage is unlikely to be resolved, unless demand improves or the US cuts its output levels.

“The US is unwilling to reduce output via centralised planning as that goes against capitalism ideals,” he said.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the firm’s base case is still US$35 per barrel for the Brent futures contract.

Brent trades at a premium to WTI at US$20 a barrel at press time yesterday.

“The July and August contracts are trading at US$27.03 and US$29.13 per barrel respectively. Beyond September, WTI is going to be more than US$30 per barrel. So, I think our base case of US$35 per barrel is attainable,” he told The Malaysian Reserve (TMR) yesterday.

Mohd Afzanizam said the negative price event on the WTI contract was due to opportunistic speculators with little or no actual business in the oil and gas industry who are taking advantage of the inconsistencies in the market to make substantial gains from the derivative contracts.

“They have to sell or close out the position prior to the maturity of the futures contract. Otherwise, they have to accept the physical delivery which can be thousands or millions barrels of oil,” he said.

Mohd Afzanizam said despite that, the prevailing condition resonates with the supply glut narrative and keep crude oil prices low in the near term.

National oil company, Petroliam Nasional Bhd (Petronas), he said, would need to be very mindful of capital expenditure (capex) plan and move to conserve cash.

Last Wednesday, Malaysia announced its decision to cut crude oil production by 136,000 barrels per day (bpd) for May and June.

Minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed told Reuters that the country welcomes the supply reduction agreement between OPEC+ producers which will help stabilise the energy market and ensure supply security for consumers.

BIMB Securities Sdn Bhd analyst Azim Faris Ab Rahim said despite the production cut, he expects Petronas to remain committed to its budgeted capex for local upstream for 2020.

“We, however, expect some delays for new projects from 2021 onwards. This may include drilling (which may affect Velesto Energy Bhd) and new offshore development projects (which will affect service contractors and offshore service vessel players) such as Petra Energy Bhd, Dayang Enterprise Holdings Bhd, Carimin Petroleum Bhd, Perdana Petroleum Bhd, Alam Maritim Resources Bhd and Icon Offshore Bhd),” he told TMR in a brief WhatsApp message on Monday.