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WTI April 20/21 (Source: Bloomberg)
SAO PAULO – In a totally unprecedented situation, the WTI oil contract for May opened the session last Monday (20) at US $ 18 per barrel, but it started to drop sharply during the afternoon and closed at a drop of 305, 97%, at an incredible $ 37.63 per barrel. In other words, the operators were paying to get rid of the contract, which caused puzzlement, but also many doubts among investors.
The downward movement of the merchandise, at first, has reflected the market perception that the cut of 9.7 million barrels per day announced last week by the Organization of Petroleum Exporting Countries and allies (OPEC +) will not be enough to face the drop in world demand due to the economic impacts of the coronavirus, of around 30%.
However, as Morgan Stanley points out, while oil markets are oversupplied and the short-term outlook does not look encouraging, such a steep sale cannot be explained by global supply and demand fundamentals alone, but by technical factors. . details
Furthermore, it is worth mentioning, even at Nymex, WTI oil for June, the most liquid contract at the moment, closed the session on Monday in a fall of 18.40%, to US $ 20.43 per barrel, while Brent for the same month, also a more liquid contract, ended the day with an 8.94% drop to $ 25.57 per barrel, showing the discrepancy between the contacts. In this Tuesday’s session (21), while the WTI for June falls 36%, to US $ 13.08, and the Brent falls 23.54%, to US $ 19.55, the WTI contract for May increases 114, 32%, to $ 5.39, returning to positive territory.
To explain the movement of the previous day, it is worth noting that future oil contracts refer to specific delivery periods. The WTI contract that registered such movement refers to oil delivered in May and which is very close to expiration, more precisely this Tuesday.
The WTI contract is established through the physical delivery of oil. That is, the owner of the contract on the expiration day receives barrels of crude oil.
The oil market has a large number of financial participants that cannot receive physical deliveries. “Therefore, these participants need to sell their contracts before expiration to the players who are able to receive these barrels,” says Morgan Stanley. Futures contract operators generally manage to smoothly move from the expired contract to the next, but this is not what happened this time.
Any contract that is not resolved must be resolved with a (physical) delivery of the oil barrels associated with the logistics center of Cushing, in the state of Oklahoma, during the month of May.
The problem is that the oil storage capacity at this location is rapidly running out, and the US Energy Information Agency. USA (EIA) reported inventories of 55 million barrels in the week of April 10, compared to an estimated capacity of 76 million. barrels, as shown in the following chart prepared by XP.
The fear is that there will be no capacity available between May 1 and May 31 for holders of the May 2020 WTI contract to store their oil.
“Therefore, traders who still held such positions were looking to ditch their contracts in a market environment where there are few marginal buyers, creating a liquidity shock,” says Gabriel Fonseca, analyst at XP Investimentos, in a report.
As the contract, close to expiration, tends to register much less expressive liquidity, there was a strong impact on its prices, indicating that the operator was willing to pay someone else to store its barrels of oil for fear of not having where to store it.
Therefore, he points out, the price movement illustrates the deterioration of world oil markets given the strong shock in demand. However, the phenomenon also has a local dynamic, since it depends on logistical factors, recalling that negative oil prices have also been observed in Canada.
“In the case of offshore producers (who extract oil from the seabed), this pressure is less due to the availability of oil tankers as a form of storage, which explains the relative better performance of Brent prices,” Fonseca evaluates. .
What to expect from now on?
Despite the unprecedented movement in the May WTI that is mainly explained by technical factors, doubts about the sector remain in the market, creating pressure for contracts with future maturity.
Morgan Stanley analysts estimate that oil storage in the United States should reach a maximum capacity of 522 million barrels by June. “The collapse of the market should accelerate the necessary cuts in US production … But the road to full recovery remains long and uncertain, “they point out.
The economist and technical coordinator of the Institute for Strategic Studies of Oil and Gas (Ineep), Rodrigo Leão, told Agência Estado that China also contributed to the abrupt drop in oil prices and that it should not help the recovery in the short term . The expert argues that the Asian country increased imports last month to expand its stocks and the expectation is that it will not buy again next month.
Edmar Almeira, professor at the UFRJ Institute of Economics and researcher at the PUC Energy Institute (Iepuc), also said that the future market should live another four months with the devaluation of the product and even with the negotiation of new contracts. at negative prices, since the storage capacity is kept to the limit.
“The United States is a victim of the crisis they caused, by reducing production costs and filling the oil market, creating an imbalance between supply and demand,” he says, adding that the only solution is to close production wells.
It is worth mentioning that, according to Bloomberg, US President Donald Trump plans to make purchases of 75 million barrels for the US Strategic Petroleum Reserve. USA (Acronym SPR) to provide some support to the country’s industry.
However, as XP points out, the latest data from the US Energy Information Agency. USA (EIA) show that SPR stocks are at 635 million barrels compared to its authorized nominal capacity of 713.5 million barrels, indicating limited scope for the US government to act in this direction. “In addition, making such purchases requires the authorization of the United States Congress, something that was not possible in the discussion of economic stimulus packages in March,” he reinforces.
In this environment of global deterioration in the oil market, it is considered practically inevitable that more oil cuts occur, such as the 9.7 million barrels agreed by OPEC +.
Saudi Arabia (one of the world’s largest producers) said it was ready to take further steps with OPEC members and allies to achieve stability in the commodity market, state news agency SPA reported. “The kingdom is committed to Russia to implement production cuts in the coming years,” it said in a statement.
Many producers will still have to shut down their production wells due to a lack of physical capacity to store barrels of oil.
However, this should lead to a side effect, as XP’s Fonseca points out: after such closings, what you will see is a market with a structurally lower oil supply for longer, as part of the oil wells that They have been unable to return to production for geological and economic reasons.
“Therefore, the more producers have to close their wells in the short term to avoid a scenario of depletion of storage capacity, the faster the recovery of oil prices in the medium term in a scenario of normalization of demand , which, in turn, time, will depend on the gradual normalization of activities in order to quarantine ”, he evaluates.
Brent also dropped sharply
Although movements are more intense for the WTI, brent oil, used as a benchmark by Petrobras (PETR3; PETR4), also registered a sharp drop and reached a value of less than US $ 20 per barrel for the first time since 2001.
Petrobras’ business plan was prepared for the scenario of the barrel of $ 40, on average. Recently, however, Roberto Castello Branco, CEO of the state-owned company, said he was cutting costs to handle quotes from $ 20 to $ 25. “The impact was deeper than we imagined,” he said.
Meanwhile, the CEO said, the Petrobras divestment program is maintained, but should be delayed, while emphasizing that he is confident that the financial settlements of the assets already sold will happen “at the appointed time.”
In this scenario of uncertainties, the company’s ADRs (in practice, the shares of companies outside the United States that are listed in New York) registered a fall this Tuesday, on a holiday on the Brazilian stock exchange, with a decrease of about 4% during the afternoon
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