#Market Strategy — 21.04.2020

CIO Insights: Negative WTI Oil Price. Why?

Prashant Bhayani, Grace Tam & Dannel Low


The May WTI futures contract which is due to expire today collapsed to a session low of -USD40.3 last night, the first time prices fell below zero in history. This literally meant that buyers are being paid to take barrels of oil away, as holders of the May contract did not want to accept physical delivery, having been struggling to find storage facilities at Cushing, Oklahoma which is the main delivery point in the US for WTI futures.

Except for the May WTI futures, elsewhere appears functioning normally. The June WTI futures fell 9% yesterday to a session low of USD20.3, more in line with Brent crude price which also declined 9% to a session low of USD25.40.

WTI Futures

May WTI futures fell into negative territory last night, while June WTI futures function normally

Source: Bloomberg, BNP Paribas WM, as of 21 April 2020

What explains the gap between WTI and Brent oil prices?

The key difference between WTI and Brent crude is their extraction locations. WTI oil (produced in North America) is the benchmark for North America crude, while Brent oil (produced in North Sea in Europe) is a global benchmark with around two-thirds of the world’s crude oil production referencing to Brent.

Factors that affect the spread of WTI and Brent include the costs of storing and shipping crude, quality, political events, inventories and demand.

Will the WTI-Brent spread narrow?

Firstly, pipeline developments since 2009 allow oil to move from Cushing to the Gulf Coast. This could ease supply pressure at Cushing.

Secondly, recent US government action to lease 30 million (potentially going up to 77 million)  barrels of space in the Strategic Petroleum Reserve for producers to store their excess oil output could also alleviate pressures on commercial storage capacity.

Thirdly, US production cut and ongoing elevated exports of US light crude oil to international markets will likely compete with Brent, keeping the pricing of both benchmarks in close proximity.

wti versus brent

Current gap between June WTI futures and June Brent futures is around USD4

Source: Bloomberg, BNP Paribas WM, as of 21 April 2020

The oil outlook

The oil market will not be out of the woods in the near term amid weak oil demand and a lack of available storage space. High frequency data suggests activity in the airline industry has fallen by more than 60% over the past month.

Global oil consumption is estimated to have fallen by at least 30% amid stay-at-home restrictions and business closures due to the coronavirus pandemic.

According to estimates OPEC presented at the G20 meeting, global oil demand will fall by 6.8 million barrels per day on average in 2020. Some 15% of demand (or 12 million barrels per day) will be lost in Q2.

The OPEC+/G20 cuts of 9.7 million barrels per day should offset most of the shortfall. However, for April, OPEC expects oil demand to fall by 20 million barrels per day, while some physical trading houses’ forecasts are as much as 35 million barrel per day. In the short term, the supply agreement cut is insufficient to halt the selling pressure.

In the US, before the coronavirus induced demand drop, low forward WTI prices were already a problem for the US shale oil industry. The sector saw a high number of bankruptcies among the smaller producers.

The small independent companies that still dominated the industry were finding it increasingly difficult to raise money and struggled to generate positive free cash flow consistently. US drillers cut 40 oil rigs in the week of March 27, the most in a week in nearly 5 year.

The number of active drilling rigs have declined from 831 early April 2019 to 624 on March 27.

We do not expect a sustainable price recovery until pent-up demand is released with the lifting of confinement and social distancing measures globally in Q3. The combination of lower supply later this year and rebounding global demand when the lockdown period ends should help Brent price to recover towards USD45-55/bbl at the end of 2020.

Also, the longer term outlook for oil is positive given the low level of capex decisions made during the 2014-2017 downturn (investment plans are again cut heavily this year).

Without investments, the production of traditional oil fields will decline by 6-7% per year on average. Additionally, we expect that the negative impact of the energy transition should only be felt from 2025 onwards.