(The opinions expressed here are those of the author, a columnist for Reuters.)
LAUNCESTON, Australia, April 23 (Reuters) - The unprecedented collapse in U.S. oil futures into negative territory is an event that has little direct relevance for the industry in Asia, but still holds vast significance for the world’s biggest crude-importing region.
The immediate fallout from the dramatic plunge into negative pricing for the front-month West Texas Intermediate (WTI) futures was largely a result of the design of the contract, which requires physical delivery to the storage hub at Cushing, Oklahoma, that is already near full.
The contract dropped to as low as minus $40.32 a barrel on April 20, the day prior to expiry, as investors unable to secure physical storage had to exit positions at any cost.
The dramatic swings in U.S. oil prices in recent days has been viewed by Asia’s trading community as fascinating, but not really relevant given that the vast majority of crude traded in the region is priced off Brent futures, or a combination of the Dubai Mercantile Exchange’s Oman contract and Middle East assessments by price reporting agencies.
While these benchmarks have dropped sharply, they are still fulfilling their price discovery functions, and it would be hard to argue that the market for crude in Asia is currently dysfunctional, even if prices are extremely low, and in the case of the DME contract, near the weakest since its 2007 launch.
The DME contract is physically settled, but delivery is at a port and is therefore unlikely to suffer from the same constraints as the landlocked delivery point for WTI.
But what the fiasco in WTI futures does show is that the crude market is capable of becoming disorderly and unruly under exceptional circumstances, and Asia’s traders would be wise to be cautious.
For example, the deal to cut output by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, by 9.7 million barrels per day (bpd) has largely passed by Asia, with exporting countries still appearing to compete hard on winning or keeping market share.
In the wake of the deal being agreed on April 12, Saudi Arabia’s state-controlled oil company released its official selling prices for May, which raised prices for the United States, kept them flat for Europe, but cut them for Asia.
Saudi Aramco’s benchmark Arab Light grade was set at discount of $7.30 to the Oman/Dubai average for Asian refiners for May loading cargoes, a steeper discount than the $4.20 for April.
This was seen by many in the market as a sign that the Saudis were still planning on chasing market share in Asia, even in the face of weakening demand.
The Saudi move has also ensured that other Middle East producers kept oil prices low for Asia, as did Russia.
DEMAND CAN’T KEEP UP WITH SUPPLY
The problem is that Asia’s refiners are starting to experience weak demand for fuels, especially gasoline and jet kerosene, and are starting to cut back on output.
Only China is taking more crude, with Refinitiv Oil Research estimating that imports will total 10.42 million bpd, up from March’s 9.72 million bpd.
Russia is set to supply more crude to China than Saudi Arabia for a second month in April, according to Refinitiv, perhaps underscoring that the rivalry between the world’s two biggest exporters is still ongoing.
However, outside of China is where the lesson of the WTI debacle are likely to become more acute for Asia.
Already, much of the region’s storage capacity outside China is either nearing capacity, as in India, or is booked and unavailable for new flows.
This means that many refiners in the region will have no option but to cut throughput, and in turn reduce crude purchases, no matter how cheap oil eventually becomes.
If the crude suppliers to Asia, led by Saudi Arabia and Russia, fail to meaningfully cut back on supplies, then they run the risk of a disorderly collapse in prices as they desperately try to sell crude that refiners can’t process or store.
With the region’s number two importer India still under lockdown and increasing problems in third-ranked Japan with containing the spread of the new coronavirus, it’s likely that Asia’s demand for crude imports will stagger in coming months.
China by itself won’t be enough to hold up demand, and even if other countries in the region do manage to start lifting lockdowns in the coming weeks and months, the process is likely to be uneven, meaning that crude demand won’t recover as sharply as it fell. (Editing by Christian Schmollinger)
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