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KT explains: Why US WTI crude price fell below zero, and what it means for you
Dubai - KT answers some questions you may have about the US oil price falling below zero.
1. How many grades of oil are there?
There are three main grades or benchmarks for oil - Brent, WTI and Dubai/Oman. Most of the crude oil prices are pegged to these three benchmarks.
2. Where are oil grades traded?
WTI is a light crude with low density and is 'sweet', as it has low sulphur content. Brent is lighter than WTI. WTI contracts are traded on New York Mercantile Exchange while Brent futures are available on ICE Futures Europe. The Dubai benchmark is marketed on Dubai Mercantile Exchange.
3. What are oil futures and how do they work?
Futures are advance contracts and are highly volatile. Buyers and sellers of crude oil agree to deliver specific amount of oil on a given date in the future. Oil futures are traded because oil extraction and delivery via tankers is a time-consuming process. Since factories and economies need assured oil supply to run smoothly, they sign advance contracts, called futures.
4. Why did WTI price fall below zero on Monday?
The key reasons for the decline in the WTI price was the slump in demand, no storage capacity in the US and the expiry of the future contract. Demand slumped due to the impact of coronavirus on the global economy, while refineries rejected WTI crude supply because storage sprinted to the brim. Under futures contract, WTI needs to be physically delivered while Brent is deliverable offshore. Given logistics and storage constraints in Cushing, Oklahoma (where WTI is stored) for physical crude amidst low demand, traders started selling Tuesday's futures to avoid taking physical delivery. This pushed WTI price into the negative territory on Monday.
5. What is the problem with oil storage capacity?
Due to the massive oversupply on Monday, traders rushed to find storage on land and at sea in what is believed to be the biggest oil glut in history. Fuel storage rates doubled this month in some onshore European and US hubs as traders rushed to secure tanks in the hope of selling their products at a higher price when the coronavirus outbreak eases and demand recovers.
6. What is floating storage?
Oil can be stored in very large crude carriers (VLCCs), commonly known as supertankers. On Monday, oil held in floating storages on tankers reached at least 160 million barrels, including 60 supertankers, which can each hold 2 million barrels. This can be compared with 25 to 40 VLCCs already chartered with storage options at the start of April and fewer than 10 VLCCs in February. The last time floating storage reached levels close to this was in 2009, when traders stored over 100 million barrels at sea before offloading stocks.
7. Will the fall in WTI price benefit the UAE residents in the form of lower oil prices?
Due to the contagion effect from the fall in WTI and Brent prices, it is highly likely that the benchmarks on which UAE oil prices are fixed each month will go lower. Therefore, we could see lower oil prices for UAE residents in May 2020. UAE retail oil prices are based on S&P Global Platts, which is a benchmark for refined petroleum products. UAE Retail Pricing Committee for Refined Petroleum Products adds margin and transportation/logistics cost etc. to the Platts prices to arrive at the retail prices for refined petroleum products each month. Global Platts price changes are linked directly to the changes in Brent crude.
8. What does it mean for airlines?
For cash-strapped airlines, the decline in crude prices will make it cheaper to operate flights that are already nearly empty as people remain homebound due to the coronavirus.
The plunge in crude futures also indicates that the market does not expect airlines to add back many flights to their slimmed down networks any time soon, said Raymond James analyst Savanthi Syth.
waheedabbas@khaleejtimes.com
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