Industry Knowledge
Oil prices in review
THE SENSATIONAL AND UNPRECEDENTED NEGATIVE PRICE FOR MAY WTI FUTURES WAS AN ANOMALY DUE TO US PRODUCTION
AND US STORAGE ISSUES BUT IT IT WILL HAVE WIDER IMPACTS FOR AS LONG AS THEY CONTINUE AND WAS ALSO A SYMPTOM
OF UNDERLYING ISSUES THAT THE INDUSTRY MUST ADDRESS. WE LOOK AT THE WIDER PRICING PICTURE.
A rebalancing of supply and demand
Ian Moore, director of the Oil Market Journal,
gives some insight; “Oil prices are in free fall
as the market tries to force a rebalancing of
supply and demand. The storage crisis which
is now being played out was inevitable after
the combined effects of the failure of OPEC
and Russia to agree cuts on 6th March as well
as widespread COVID lockdowns taking effect
resulting in oil demand down to about 70m
bpd from 100m bpd. The cuts from 1st May
agreed over the Easter weekend, will shift things
in the right direction but still leave a Q2 2020
oversupply of around 20m bpd.
“The latest data (15th April) indicates “US
Total Oil Demand” down around 6,000 million
bpd (-30%) from before the COVID crisis
spread to the US. And the fall in demand in the
US is replicated across the world.
Even late March, the OMJ daily report
was already anticipating the current issues
stating: ‘In the near term we expect things to
get rather messy in April and May as storage
fills. Oil analysts continue to warn that global oil
storage tanks will be full by mid-May.’
And by early April: ‘Our expected scenario
is full global oil tanks in late April and into May
which would result in a very “hard landing for
oil.”’ A forecast which certainly played out in
the spectacular and historic lows seen at time
of writing
Asked about the likely outlook Ian replied,
“We expect demand to rebound in late May
and June as the lockdown is lifted across the
US and Europe. However, demand during the
summer will likely level off much lower than
normal.
“Global oil stocks will remain high through
2020 and it is likely crude prices will remain
below $45 during 2020 and well into 2021.
We also expect some important demand
sectors such as aviation to take years to recover
resulting in low cost heating oil for UK and
Ireland consumers over the next few years. “
Aberdeen-based Derek Leith, EY’s global
lead for oil and gas tax, comments; “The
West Texas Intermediate (WTI) price drop
is not reflective of the oil and gas industry
worldwide but is very specifically driven by the
18 Fuel Oil News | May 2020
production and demand imbalance in the US.
The headline-grabbing negative oil price was
driven by a relatively small number of May
contracts held by financial traders having to be
sold before they expired, and the sellers finding
there were absolutely no buyers.
“While WTI prices won’t directly impact
on the UKCS, this is a stark reminder of oil price
volatility, and that smaller UKCS producers
may find it very hard to sell their crude at the
prevailing market rate. There is likely to be
a renewed focus and rigour on decreasing
operational costs, particularly for smaller
players. The companies which respond quickly,
are agile and carefully strategic are likely to
emerge in a better position in the medium and
long-term.”
An unprecedented oil market
“We are faced with an unprecedented oil
market where the factors affecting price are
beyond anyone’s control,” comments Basil
Shrourou, founder of Fuel Prices Online. “What
began as a three-way output spat between
Russia, Saudi and the shale oil producers in US
was quickly overshadowed by the catastrophic
impact on demand of the coronavirus resulting
in a price in freefall and cargoes reportedly
almost ‘given away’ as storage reached
capacity and no-one was inclined to buy”
Asked about the likely future direction Basil
stressed that there is very little action anyone
can take with future pricing dependent on the
containment of Covid-19 as the first OPEC+
cut seems to have had very little impact on the
market. “Based purely on previous experience,
if we don’t hear some good news on the virus
and economy soon, we will see international
facilities shutting down and cessation of
imports. With a reported 75% drop in forecourt
sales as a result of the lockdown, there is no
point producing some product that cannot be
sold or stored.”
However, Basil is hopeful that we are
approaching the bottom. “Once there is positive
news, we will see demand begin to lift again.
With kerosene at approximately 9ppl (Platts
calculated PPL) at time of writing and the spot
real time, as I am looking at my FPO App, it is
trading even lower than the 8ppl level we saw in
96/97 when the Pound £ exchange rate was at
approximately $2 US Dollars. This is creating a
real dilemma for distributors considering buying
long term but concerned about storage”
With UK ‘heating oil’ prices down more
than 57%, is it time to fill the tank?
While the UK and the rest of the world get their
benchmark from Brent Crude Oil this is also
down to less than $21 per barrel. At its highest
point in 2020, it was trading at $71.25.
For people on oil-fired heating, this is
already having a massive effect on their prices
but more could follow. OGUK boss Deirdre
Michie commented; “The dynamics of this US
market are different from those directly driving
UK produced Brent, but we will not escape the
impact.
“Although production levels have been
reduced drastically, it is still not enough to
offset the fall in demand, which is at the lowest
levels in 25 years. A recent report from The IEA
warned markets to brace for an unprecedented
lack in demand, that will reach levels not
experienced since 1995.
While there is still the potential for the
price to decrease some countries are starting
to relax lockdown measures, this could lead to
an uptake in demand and cause oil markets to
begin to recover.
“It would be advisable for people with oil
central heating to at least consider filling the
tank while prices are still low.“
Sustained increase in orders
Through this period of ‘change and turmoil’,
Rob Maynard, CFO Boilerjuice, has also seen
significant impacts on the heating oil supply
chain.
“There has been a significant and
sustained increase in people searching online
for heating oil since the middle of March, with
an initial period of slightly panicky buying as
people spent more time at home followed by
customers stocking up at the lowest prices seen
for a very long time.
“We’ve experienced a record number
of online quotes and orders through the