You must be wondering, how can oil price goes to negative?
Since I was previously primarily in the Oil and Gas industry, I remember 2008 when Oil hit $147 per barrel, and now imagine it is worth nothing.
If buyers are able to find a place to store the oil, there is possibility of huge gains. However, the strategy is dependent on locating a storage facility and managing that expense, as well as actual major changes in global demand.
STORAGE IS FULL
The largest oil depots for storing the big stockpile of WTI oil in USA is a place call Cushing in Oklahoma, and tank farms of 76 million barrels are to the brim. Operators are fully booked. Storage jumped by 5.7 million barrels the week before. To add pain onto the onshore glut, there are also ~160 mil barrels of oil offshore on tankers waiting for buyers.
On Monday 20 April is the last day to settle the contracts for May. Oil prices began to rise again on Tuesday today 21 April as oil traders turn their attention to trading oil for delivery in June. Contracts not closed in May can be rolled over to June, but because of the contango resulting in huge spreads, it will result in big losses.
WHY NO DEMAND
This is obvious, thanks to Corona virus which essentially shut down the most of the USA economy leading to low demand. The crisis was further compounded after Saudi and Russia engaged in a price-war to increase supply. Although cuts of 10 million barrels were further agreed, but market fear that the cut is insufficient.
HOW ABOUT OIL COMPANY LIKE EXXON AND SHELL?
You can check their share prices which drop in share prices pale WTI plunge. These oil giants are comparatively less affected as their business are diversified into exploration (Upstream), refinery (Downstream) and Chemical etc. And these companies are not merely oil producers but also natural gas and chemicals sellers. These companies also invest long term into Upstream exploration business which involves projects that will only materialise few years later before the first oil is produced.
There is also a reason why you do not find Petrol of your car as cents per litres because it involves refinery and transportation costs etc. This is where Exxon or Shell refineries earn their profits. In fact the cheaper the crude oil, the lower the material cost for refiners.
HOW ABOUT KEPPEL CORP AND SEMBCORP?
Likewise, Keppel Corp and Sembcorp who saw little decline in share price. Both Keppel and Sembcorp had been in progress of diversifying out of the Oil and Gas market since the 2015 oil crash which also revealed corruption cases in Brazil. Keppel has property businesses, Data REIT, Electricity, Infrastructure businesses etc. Sembcorp is involved in utilities, environment and energy, water industries etc with clients spread over the region in Asia, UK and ME. Hence, the fall in pricing is not as drastic even when oil price tumbles yesterday.
USA is the largest producer of oil due to shale discovery in the last decade. With oil price hitting the floor, many oil producing companies are expected to go bust. Shale producers will be hit hard first due to their higher cost of producing oil compared to the traditional oil exploration of Middle-Eastern countries in particular. Also, USA is also 3rd largest oil exporter. With oil price tumbles, revenue of the country will plunge as well.
Oil exporting countries who derived most of the revenue from oil are also going to suffer badly. Saudi is top exporter followed by Russia. Their move to increase supply few weeks back has backfired and slapped their own cheeks reducing their own countries’ revenue significantly.