Tuesday, 21 April 2020

Negative Oil Price – what it means? And how come Exxon or Shell share price did not fall as much? How about Keppel and Sembcorp?

Oil price in USA, for the first time in history, plunged into negative US$37 yesterday.

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.

How can it be?

To explain, Oil is a commodity traded on its future price. This means that you can buy Oil contracts now but the delivery is in May, or in June, or in July. Each contract trades last a month.

CONTANGO

Another term which you probably needs to know is Contango which is the current oil situation. Contango means the price of spot price is lesser than the forward futures’ price. This means oil is expected to be more valuable in future, when demand rise again. Currently there is a huge contango, meaning the front month oil price compared to the second month oil price exists a huge spread. 

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.

In simplest terms, the negative oil prices means the oil producers or sellers instead of selling, are now willing to pay buyers to take oil off their hands amid fears that most storage facilities will run out of space by the end of May.

There are speculative traders and real buyers (e.g. refineries) who needs the oil. And as contract settlements in May nearing with no more storage space, the speculative traders of the oil who does not need the physical oil is desperate to sell the contracts they owned. But there isn’t so many real buyers due to low demand.

Hence, if the speculative cannot find buyers of the oil for May, then they will have to end up taking the physical delivery of oil, with no place for storage. That is why they are desperate to sell even when it means paying money for the other party to own the oil contract. Hence at negative 37 bucks, meaning they are paying the buyer $37 a barrel to own the oil.

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. 

Nonetheless if oil demand continues to lag supply, it is a matter of time where these stocks will have share price sliding down too.

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.

Although internationally, the benchmark for oil is Brent Crude which is below US$20 per barrel, it is also a matter of time due to low demand, there will be the same problem as WTI.

Nearer to home is Malaysia, who is also net exporter of oil. If oil price declines greatly, the country’s budget deficit will rise. It is double whammy considering the shut-down of the country now due to Covid-19.

Singapore is net importer of oil, so we will be less affected. That said, the impact of historical low oil price will without doubt also have psychological repercussions to the local market. 



13 comments:

  1. Replies
    1. Hi Kevin, thanks. Stay fit and healthy during this period. Love your play room as well.

      Delete
  2. 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.

    ReplyDelete
    Replies
    1. 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

      Delete
    2. 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?

      Delete
    3. 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

      Delete
  3. 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.

    ReplyDelete
    Replies
    1. 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.

      Delete
    2. 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”.

      Delete

  4. Hi everyone, I saw comments from people who had already got their loan from Steve Wilson Loan firm. Honestly I thought it was a scam, and then I decided to make a request based on their recommendations. A few days ago, I confirmed in my personal bank account amounting to $720,000 , which I requested for business. This is really good news and I am so happy that I advise all those who need a real loan and who are sure to reimburse to apply through their email (WhatsApp) +16673078785 There are sincere loan lenders!
    They are able to lend you a loan.
    Contact Mr Steve Wilson.
    E-mail: stevewilsonloanfirm@gmail.com
    WhatAapp:+16673078785

    ReplyDelete
  5. i read a lot of stuff and i found that the way of writing to clearifing that exactly want to say was very good so i am impressed and ilike to come again in future.. gis midstream

    ReplyDelete
  6. Hello everyone, Are you into trading or just wish to give it a try, please becareful on the platform you choose to invest on and the manager you choose to manage your account because that’s where failure starts from be wise. After reading so much comment i had to give trading tips a try, I have to come to the conclusion that binary options pays massively but the masses has refused to show us the right way to earn That’s why I have to give trading tips the accolades because they have been so helpful to traders . For a free masterclass strategy kindly contact (paytondyian699@gmail.com) for a free masterclass strategy. He'll give you a free tutors on how you can earn and recover your losses in trading for free..

    ReplyDelete
  7. Natural herbs have cured so many illness that drugs and injection can’t cure. I've seen the great importance of natural herbs and the wonderful work they have done in people's lives. i read people's testimonies online on how they were cured of HERPES, HIV, diabetics etc by Dr Edes herbal medicine, so i decided to contact the doctor because i know nature has the power to heal anything. I was diagnosed with Herpes for the past 3 years but Dr Edes cured me with his herbs and i referred my aunt and her husband to him immediately because they were both suffering from Herpes but to God be the glory, they were cured too .I know is hard to believe but am a living testimony. There is no harm trying herbs, Thanks. Write him on WhatsApp on +2348151937428. @dr_edes_remedies deals with
    (1)Alzheimer virus
    (2)Cancer
    (3)HIV
    (4)Herpes
    (5)Genital warts
    (6)ALS
    (7)Virginal infection
    (8)HPV
    (9)Hepatitis
    (10)Asthma
    Email him on dredeshome@gmail.com
    https://dredesherbalhome.weebly.com

    ReplyDelete