Last week we saw negative oil prices hurt energy markets enormously, and we have the global pandemic—coronavirus (COVID-19) to blame for that, as nearly the entire globe is on lockdown, that sucks the life out of energy-consuming spheres.
Reports indicate mixed feelings as Bloomberg noted that, oil prices could go down again, as storage shortage becomes another nagging factor to the problem, and yet—we have seen people paying to get rid of their stock.
“The last trade of the May WTI futures was on April 21, and on April 20, as financial traders with long positions scrambled to get out of the contract, the price fell to negative $37.63 per barrel. Then on April 21, it was fine again, and the contract finished at $10.01. Even on April 20th, most trades in the May futures happened at positive prices. But toward the end of the day, panic—or something—set in, and for a short period people were paying to get rid of their oil futures,” Bloomberg opinion article argued.
On the other side, another Financial Times report noted that US oil prices endured another day of volatile trading on Tuesday as concerns over storage capacity prompted fears the American crude benchmark could again plummet into negative territory.
“The West Texas Intermediate contract for June delivery fell 20 per cent to a low of $10.07 a barrel in early London trading, before clawing back nearly all of its losses to settle 3.4 per cent lower at $12.34. The volatility came on the heels of a 25 per cent plunge in the price of the same contract on Monday,” Financial Time reported.
Franklin Templeton insight
However, the investment firm, Franklin Templeton Head of Equities Stephen Dover, has a rather analytical view on the oil price debacle, bringing in producers and consumer to the table.
“The problem is that currently more oil is being produced than can be consumed or stored, so oil’s negative price is only available to those with storage capacity,” Dover told The exchange in an email.
According to the expert, the most-pricy substance did the seemingly impossible this week—oil prices fell over 100 per cent in a day. Buyers were effectively paid to have crude oil delivered to them, as futures contracts for May delivery traded below -$35 per barrel (bbl) at one point.
“Humanity is experiencing the hardship and profound devastation from COVID-19, inadvertently contributing to the worst day for crude oil prices in history,” argued.
The firm with over 70 years’ experience, highlighted that, despite recent Russian and Saudi Arabian agreements to cut production, they believe the demand for oil-based products will continue to be far below the supply.
However. today Financial Times reported that the pandemic has cut down demand for oil by close to a third, raising concerns that a binge of unwanted supplies will overwhelm global storage capacity. Oil tanks have been filled up or booked out by traders, while the amount of crude and fuel being stored on vessels at sea has surged, with IHS Markit putting seaborne crude stocks at 175m barrels, up from 100m in late March.
“Energy stocks have underperformed for so long that they no longer have much impact on overall equity market returns. Only 10 years ago, Exxon was the largest market capitalization stock in the S&P 500 Index. Now, the market value of all the energy companies in the index is less than that of Google-parent Alphabet,” Dover said
According to the Head, the Morgan Stanley Capital International (MSCI) emerging markets index is much more dominated now by information technology/communication services stocks and consumer stocks, which are 30 per cent and 22 per cent of the index, respectively. In 2010, energy companies comprised nearly 14 per cent of the index.
Hence, the experts find a win-win scenario in the debacle as he argues that, despite countries hurt by the fall in crude oil prices including Saudi Arabia, Russia, Iraq, UAE, Kuwait, Iran, Canada and Norway. Some countries benefited from lower prices such as European countries in general, China, Japan, the United States (a net gain despite shale), India, Korea, Singapore, Thailand, Australia and Taiwan