FUTURE CONTRACTS
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.
REPERCUSSIONS
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.
Thanks for sharing 😉
Hi Kevin, thanks. Stay fit and healthy during this period. Love your play room as well.
Hi Rolf,
Another unusual thing that happened besides the negative price is the leverage ratio going below 1 for some brokers. Leverage for futures contracts can vary between 10 to 20. On Interactive Brokers for WTI May contract when oil price was still positive, leverage ratio went below 1. Now, broker also very scared about clients being blown up. Indeed, when unusual, unprecedented events happen in financial markets, it's not surprising to see even experienced traders getting blown up. Like Hin Leong.
As an insider in the oil industry, what is your opinion about what happened to Hin Leong?
This company is unusual. Hin Leong should be a commercial hedger for oil futures contracts, yet it does not do hedging. Not only not do hedging. Hin Leong actually speculates in oil futures and its downfall can be traced to losses in futures speculation. OK (or should I say KO) Lim and family should be making lots of money from the oil tankers they own today. Yet, they're financially distressed instead of prospering today.
Hi hyom, thanks for commenting. Over the years, you always made very good comments on all the blogs. First and foremost, may you be blessed with good health and wealth during this period.
As for your question, I think I will disappoint you. While I am familiar with Oil and Gas industry this is not my segment, so I can't really answer. Sorry mate.I am more in the upstream side of the business.
Examples of segments to show who wide the industry is.
E.g. Upstream: Exploration, Geo-survey, feasibility studies, Offshore construction, pipelay, subsea wells, Well intervention, Drilling rigs, Platforms FPSOs, FSOs, Offshore Support Vessels, Iiftboats, Decommissioning, equipment suppliers etc)
E.g. Midstream: Storage and Transportation such as tankers, bunkers etc
Eg. Downstream : Refinery, petrol, lubricants, pharm, cosmetics.
For Hin Leong, I think should be Mid-Down stream, including tankers, bunkerings, Oil trading.
Just FYI – I written article on diff segments of Upstream before.
https://www.rolfsuey.com/2014/03/oil-and-gas-stocks-in-singapore.html
Hi Rolf,
Thank you for your compliments:) No problem. I like your honesty to admit you don't know instead of pretending to know.
I think low oil price will affect upstream the most. Downstream will be in distress too since demand for their products have crashed due to the virus lockdowns. Midstream should be making the most money in this oil glut. It's ironic that the biggest blow-up so far in this oil crisis is a mid-stream company.
Although you're in upstream, I'm confident you have no problems coping well in this crisis based on your past blog posts.
You take care too. Good health and wealth to you and your family. Since we are trapped at home with wife and kids, enjoy your family time with them. Make more love to your wife. Haha. But be careful as I think you have contributed enough kids to Singapore liao. 4 kids already?
Hi hyom,
I prefer to be truthful if I do not know. But if I do little research then I will say I do little research.
My company core profitable biz is not in O&G historically, and fortunately for me, I also switch role to take care of all the segments of biz over the last few years within the Asia Pacific region, so I must admit that I am very very heng in a sense…
Yeah.. stop contributing to Sg no more.. too siong physically, mentally and financially….
Hahaha.. y u say make more love… This blog is for my children to read one leh… hahahahaha
Hi hyom,
Did some research and read that OK Lim is a avid poker lover. He loves to gamble. And when you have been winning in most of your entire life to become so rich and powerful, your pride and greed will grow. It will then reach a point when you start making irrational decisions, because your big EGO will always remind you that you are the "greatest and most lucky". Unfortunately reality bites.
For Swiber, it is quite similar. The growth of the company within 10-15 yrs is tremendous, and the owners yearn for more growth, hence big borrowings.
Even Donald Trump was very prudent and successful in the 70s to 80s, and his business grew so big, so was his ego in late 80s. In early 90s, he almost go bankrupt with banks liquidating many of his real estates. Somehow, he managed to escape and survive using his "Trump" brand for listing. You can say he is capable or he is lucky.
But I believe one thing. If your EGO becomes too big, one day, you will ultimately collapse be it in business or your health or family problems that haunt you down.
So do not ever let our EGO grow bigger than we can handle for a sustain period of time. Doom is awaiting eventually.
Thanks for your reply. I did not see it until after I published my last reply.
Yes, EGO has been a problem affecting successful, ambitious people throughout history across all cultures and civilisations.
Ur last reply is correct. After i send the earlier comments, I went to read up Hin Leong website and do some research.
Also, HL is involved in investments of many big oil facilities in China, Myanmar etc. These heavy capital investments can drain out cashflow if “few project cock ups”.
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