WTI fall is unprecedented, but its importance is limited

WTI fall is unprecedented, but its importance is limited

BAKU, Azerbaijan, Apr.21

By Leman Zeynalova – Trend:

The fall of West Texas Intermediate (WTI) oil is clearly unprecedented but its importance is limited, Francis Perrin, Senior Fellow at the Policy Center for the New South (PCNS, Rabat) and at the French Institute for International and Strategic Affairs (IRIS, Paris) told Trend.

“On April 20, on the New York Mercantile Exchange (Nymex), the price of the May 2020 contracts for the West Texas Intermediate (WTI) became negative. The date of expiry of these contracts is April 21. Some producers had to find buyers before the expiry of the contract and did not have access to storage capacities. They were thus not able to wait and they decided to pay buyers in order to get rid of their crude oil. This strange phenomenon lasted one day, on April 20. If we look at the June contracts for WTI on the Nymex April 20 their price was a little above $20 per barrel. For other contracts on the Nymex (July 2020, August 2020, September 2020 and so on) prices were not negative on April 20,” he said.

Perrin noted that what happened on April 20 on the Nymex does not mean that oil can be bought for free around the world.

“On April 20, most of the oil prices were between $18 and $25 per barrel. But these prices are very low, much lower than at the beginning of this year and the fall is going on. On 6 January the price of North Sea Brent was $68/b. It is now about $21/b for June contracts in London and it could be lower very soon,” he explained.

The expert pointed out that April is a very difficult month for producers, the worst of 2020.

“World oil consumption could be 20 to 30 million barrels per day lower than in 2019 (last year world consumption was 100 million b/d). It means a fall of 20-30 percent of world demand, which is huge and unprecedented. At the same time world oil output remains very high. It will be reduced in May with the beginning of the implementation of the OPEC+ agreement, which was concluded on 12 April. According to this agreement 20 producing countries (10 OPEC member states out of 13 and 10 non-OPEC countries) will cut their output by 9.7 million b/d, about 10 percent of world production, in May and June. Cuts will be 7.7 million b/d in the second half of 2020 and 5.8 million b/d between January 2021 and end April 2022,” he said.

He recalled that the OPEC+ countries called on other producers to follow them and to add cuts of 5 million b/d. “We will have to see if some of them take their own decisions in this field.”

What is certain is that, without any political decisions, some countries will produce less oil in 2020 simply because, at the present level of crude prices (even if they are positive and not negative), it is no longer profitable to produce, according to Perrin.

“Oil companies are already reducing their capital expenditures for 2020, are cutting their costs, are reducing their drilling activities, are sometimes closing wells and are delaying or cancelling some projects. It will lead to a fall in North America's oil production this year, especially in the United States, the world's leading oil producer. U.S. oil production will fall this year and perhaps in 2021 not because President Trump will take a decision on this issue but because a lot of oil companies will produce less due to economic reasons,” he noted.

Perrin noted that the huge fall in oil demand is the consequence of the lockdown of about half of the world population in order to fight the Covid 19 pandemic.

“But it is not possible to remain in this situation for more than several weeks or a few months. These drastic measures will be softened and/or lifted and the world economy will recover. An economic recovery will lead to a greater oil consumption and will have a bullish impact on oil prices. But it is probably for the second half of this year. Oil producers (whether countries, national oil companies or private companies) will have to wait for better times and the present quarter is clearly terrible. It is important for the OPEC+ countries to implement totally their supply cuts as soon as 1 May, to cooperate between them and to go on discussing with other countries in order to stabilize the world oil market as soon as possible, probably in the second half of this year,” the expert concluded.

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Follow the author on Twitter: @Lyaman_Zeyn

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