No free oil for China after US benchmark WTI price fell below zero for first time ever, say analysts
- Stocking up on large quantities of oil costing little more than zero is not feasible due to limited storage capacity, analysts said
- Monday’s plunge of WTI contracts for May delivery were a ‘technical aberation’, according to David Chao of Invesco, who says Brent crude contracts are a better indicator of global oil prices
The brief plunge of a key US oil benchmark into unchartered negative territory on Monday was driven by a combination of short-term trading dynamics and US-specific logistics challenges amid sharply lower demand because of the coronavirus pandemic.
China, the world’s largest oil importer, where oil demand is recovering as manufacturing resumes, will benefit from lower prices, although stocking up on large quantities of oil costing little more than zero is not feasible due to limited storage capacity, analysts said.
“Chinese oil import has been flat year on year due to the impact of the pandemic,” said Sanford Bernstein senior analyst Neil Beveridge. “We estimate China to have added roughly 225 million barrels to its strategic reserve [in recent months], which we believe is already close to one billion barrels, or 100 days of imports. [We] question how much capacity is left.
“Anecdotal comments from China’s oil majors suggest that storage levels are extremely elevated in China.”
The West Texas Intermediate benchmark for May delivery closed at minus US$37.6 a barrel on Monday, a day ahead of the contract’s expiry, as the storage hub and delivery point of the contract in Cushing, Oklahoma is close to full capacity. The contract’s expiry forces all holders to accept physical delivery.
“Midstream players are now paying buyers to take oil volumes away as the physical storage limit will be reached,” said Norway-based consultancy Rystad Energy’s oil markets analyst Louise Dickson. “Pricey shut-ins or even bankruptcies could now be cheaper for some operators, instead of paying tens of dollars [per barrel] to get rid of what they produce.
“The remaining 21 million barrels of Cushing storage is almost certainly going to get filled up next month.”