After U.S. crude oil futures plummeted to negative values on Monday, the global oil market faced an obvious question: Can Brent crude oil be like this?
The answer is of course possible.
ICE European Futures Exchange confirmed Tuesday night that it is preparing for multiple Brent contracts on the possibility of negative oil prices in case of emergencies, although the June contract is currently trading around $20 a barrel, meaning that the outlook is still far away. In addition to the feasibility of the mechanism, market reality also means that negative oil prices are not impossible: is the rapid approaching saturation of global oil storage space, which has caused concerns that West Texas Intermediate Oil (WTI) futures fell to negative value.
"In North Sea , tankers act as oil pipelines, so are there enough tankers to transport oil?" said Jorge Montepeque, president of General Index. "If not, you have to pay higher and higher prices for these tankers, resulting in lower and lower oil prices." He helped shape the way globally assesses oil prices when he was in charge of S&P Global Platts.
tanker pressure is intensifying. The oil stored on these tankers is estimated to be far more than 100 million barrels, and the other is estimated to be even more than double that number. Euronav NV, one of the world's largest tanker operators, said that the coronavirus situation is driving freight rates to rise and this trend is not expected to reverse in a short period of time.
The global oil storage space is decreasing. onshore oil storage facilities are either already booked or are being filled quickly, and Brent crude is still under pressure, even if the pressure is more dispersed compared to WTI. It is not easy to close or restart the oil well, so oil storage time is probably longer than usual.
"If the oil well cannot be closed due to technical reasons, the oil produced must be cleared in the market, which may be negative." Montepeque said. There is another important difference between
WTI and Brent crude oil futures. Brent futures contract is delivered in cash by reference to the Brent index price, while WTI contract is delivered in physical , meaning traders must ship the oil located hundreds of miles from the coast.
Although this means that WTI will be under pressure due to the tight storage space of Cushing, the oversupply situation in other parts of the world is also rapidly becoming more and more serious.
Therefore, the Brent crude oil futures price can at least theoretically become negative. The real question is whether there will be sufficient production cuts before this possibility becomes a reality.
