The oil market is experiencing an unprecedented crisis, and this time even negative oil prices are coming!
As the COVID-19 outbreak broke out around the world, the oil supply surplus became increasingly severe, factories were closed, cars and planes were parked in place, and oil storage warehouses and pipelines were quickly filled. In some areas, oil prices have fallen to the point where producers need to pay buyers to pull crude oil away—which is equivalent to negative oil prices.
In order to handle the negative prices of energy-related financial instruments, the world's largest futures and options exchange, the Chicago Mercantile Exchange (CME), has recently begun to reprogram the software.
On April 15, CME Clearing House issued a test announcement stating that if zero or negative prices occur, all transactions and clearing systems of CME will continue to operate normally, and all regular transactions and position processing can be performed in the clearing, that is, the test preparation has been completed.
However, it should be noted that the so-called negative oil price currently only appears at the heavy oil spot price in some regions. In the view of industry experts, the negative price of high-grade crude oil spot or international crude oil futures is basically a wishful thinking, and the probability of occurrence is almost zero.
It is worth noting that at a time when oil prices plummeted, some industry insiders also said, "There is now that oil tanks are more valuable than oil. With inventory capacity, China should buy a lot to fill the oil tank."
Just before the press release of the brokerage China reporter, the WTI oil price contract fell by more than 7% in May, falling to the $18 line.
responds to negative oil prices, CME Group reprograms software
According to the Wall Street Journal, the prevention and control measures of the new crown pneumonia epidemic have pushed oil demand to a record low. The factory was closed and cars and planes were parked in place. As crude oil stocks accumulate rapidly, refineries are significantly reducing production activities.
"In some areas where crude oil is difficult to transport, producers may soon be forced to pay buyers to pull the oil away, which is actually equivalent to pushing oil prices down to negative values."
htmlOn April 8, the world's largest futures and options exchange, the Chicago Mercantile Exchange (CME), said that software is being reprogrammed to handle negative prices of energy-related financial instruments.On April 15, CME Clearing House stated that recent market events have increased the possibility that certain NYMEX energy futures contracts may trade and settle at negative or zero trading prices, and options for these futures contracts may be listed at negative or zero exercise prices.
It is understood that if this happens, all transactions and clearing systems of CME will continue to operate normally. Support for zero or negative futures execution prices is standard throughout the CME system. All file and message formats support such prices, and CME has long had a variety of products that operate this way, such as NYMEX BY (WTI-Brent Bullet) futures contracts and NYMEX BV options on these futures contracts.
CME Clearing House further stated that in the new version environment, orders can be submitted in CME Globex, bulk transactions can be submitted through CME Clearport, and all regular transactions and position processing can be executed in clearing.
Ping An Futures Chief Chemical Researcher Wang Kaihe said that the CME Clearing House issued a suggestion notice on April 8 that if the WTI crude oil futures settlement price in any month is reduced to between 8 and 11 US dollars, the clearing house may convert the option pricing and margin amount settings from the current model to the Bachelier model (option pricing model); if the WTI crude oil futures settlement price in a certain month is reduced to below 8 US dollars, the clearing house will convert the pricing and margin amount settings models of all WTI crude oil option contracts and all crude oil-related option contracts into the Bachelier model for the remaining trading days.
Wang Kaihe analyzed that from the detailed announcement of CME, three points can be seen:
first, the crude oil market expectations are weak, and OPEC+ was prepared before the meeting. After the spot warehouse is filled, the spot price will become very passive.
Second, the main modifications are crude oil option pricing and margin model. The relative impact on the underlying crude oil itself is limited. The main purpose is to provide pricing suggestions for market makers and maintain stable market operation.The traditional pricing models are all assumed that the price of the target is higher than 0, but the Bachelier model assigns a positive probability to the price of the target is negative, so the situation where the crude oil pricing model cannot operate at extreme prices is avoided.
Third, under the US crude oil price system, WTI futures are usually higher than the spot area price. Options are just tools to increase trading and risk management, and they are not expected to have much impact on futures prices. The market still needs to return to changes in supply and demand structure and data. Inadequate warehousing and the pace of crude oil production clearance may form strong suppression in the short term.
INTL Mark Benigno, co-head of energy trading at FCStone, also said he had never seen oil derivatives trading below zero, but began evaluating what would happen if he did so a few weeks ago. "This is a question we must consider. The setting structure of the option means that its value may fall to zero, which can limit your potential losses. When the value of the option falls to a negative number, the situation becomes completely different." The test of
CME and the negative oil price in spot prices in some regions have also made many investors wonder, is the international crude oil futures price going to continue to fall or even fall to a negative value?
Wang Kaihe said that this CME test only patched the extreme situation in the market and should not be over-interpreted. It does not mean that crude oil futures prices will really fall to negative values, and there is almost no possibility.
Fu Peng, chief economist of Northeast Securities, also told the Securities China reporter that crude oil futures prices cannot theoretically be negative. In his opinion, CME's latest test is just to examine liquidity issues.
"The import price of crude oil in some regions such as Canada is indeed zero or even negative. This phenomenon is a bit similar to the poured milk we see. It is not that the milk is really useless, but that the downstream of the economy is sluggish and unwilling to buy it in spot. Milk cannot be preserved, and the same is true for crude oil imports. It needs to be loaded into storage tanks through pipelines. Although the price of crude oil wellheads in some regions is zero, the Wti or Brent crude oil futures we trade are delivery items, and this price will not be zero or negative, because pipelines, storage tanks, transportation, etc. all require costs. In the conversion, crude oil futures must be at least 10 to 20 US dollars per barrel." Fu Peng pointed out.
Fu Peng gave an example: "For example, the import price of heavy oil in Permian, the United States is indeed low to zero. However, heavy oil needs to be added to the pipeline transportation, and the pipeline cost is a few dollars. When it comes to Cushing (Wti delivery site), there is also the cost of storage tanks. The wellhead price is indeed very cheap, but it is not the price in the storage tanks at the delivery site. It is just that this futures price is equivalent to crude oil not worth the money. Everyone is trading the pipeline, tank capacity and other fees in it."
spot price is outrageous, and manufacturers not only give away the shipping fee for free
The continued decline in national oil prices has made the bad energy industry worse.
According to the Wall Street Journal, oil prices in some regions are falling to single digits. On April 1, Hardesti's spot price for western Canadian crude oil fell to just over $8 per barrel, a heavy Canadian oil that is usually transported by pipeline or rail to the U.S. Gulf of Mexico and the Midwest for refining.
On March 30, the spot price of West Texas intermediate oil in Midland fell to slightly above $10 per barrel, and the spot price of local West Texas high-sulfur crude oil fell to around $7 per barrel. A commodity trading company recently bid for Wyoming asphalt crude oil even below $0.
It is understood that CME’s oil futures are mainly delivered through pipelines and cash. When the oil pipelines are all over, the crude oil produced becomes a problem.
There is another market statement, "European and American crude oil shorts have forced their positions in recent months, and the shorts have rented the storage tanks, and the longs have no tanks, and it is inland delivery, and no one wants the pipeline, so no longs are willing to accept the goods. What's more, the spot price is more discounted than the futures price, and no longs are willing to accept the goods on the market."
It is worth noting that the spot price of crude oil imports is already outrageously low.
Some people in the chemical industry pointed out that the cost of oil and gas production is divided into several categories. The highest is the full-cycle cost, which is the entire process from the construction of infrastructure such as oil wells to the final oil production and transportation of oil; the second is the half-cycle cost; the third level is the cash cost, which refers to the cash flow cost of maintaining production such as mining; the fourth level is the pipeline cost, which is the cheapest cost in North America. "Now the oil and gas price has become lower than the cash flow cost and pipeline cost. The manufacturer not only gives it for free, but also pays freight fees to let people pull the oil and gas away."
"Previously, there was a negative oil price in North America. When logistics could not keep up at all, spot prices may appear negative in extreme cases, but this situation should not last long." said An Ziwei, an energy chemical analyst at Dongsheng Futures Derivatives Research Institute.
htmlOn April 1, Denver-based Whiting Oil Company filed for bankruptcy.According to Bloomberg, in the face of falling oil prices, the Trump administration is currently considering paying U.S. oil producers to keep crude oil underground and exploit it without mining, helping to alleviate the oversupply situation that caused oil prices to plummet and some oil companies to go bankrupt.
Senior administration official, who declined to be named, said the U.S. Department of Energy has drafted a plan to compensate oil companies for abandoning oil reserves of up to 365 million barrels and counting it as part of U.S. government emergency stocks.
Inventory soared in a new green light, and oil prices waited for demand to recover
The fundamental factor that led to negative oil prices was the outbreak of the new crown epidemic around the world, causing crude oil demand to drop sharply, and inventory to accumulate rapidly
The latest data from the US EIA showed that in the week ending April 10, U.S. crude oil inventories surged by 19.2 million barrels, a record increase. Gasoline stocks rose 4.9 million barrels to a record 262.2 million barrels, while refining activity hit its lowest level since September 2008.
CITIC Futures Research points out that if the inventory is accumulated at the current speed and the inventory in pipelines/rails/water transportation and other transportation is not considered, the Cushing inventory in the United States will be filled in four weeks, commercial inventory will be filled in four months, and strategic reserve inventory will be filled in five months.
Dongzheng Derivatives Research Institute also shows that the capacity of the remaining crude oil and refined oil onshore can be filled in 50 days. If the refinery reduces the load on a large scale, the filling speed will be faster.
This is the problem facing the international crude oil market at present.
Regarding the prospects of oil prices, An Ziwei said that the current market has many doubts about the "market-driven" production cuts such as the United States. When demand is at freezing point, the core of whether to reduce production in the future is not whether there is a protocol, but the limit of the storage capacity, and the supply side needs to make a necessary response to the sharp drop in demand.
As of April 10, the U.S. commercial crude oil reservoir capacity utilization rate has reached 77%. The decline in refinery operation rate has dropped rapidly to less than 70%. As time goes by, inventory will accumulate at an astonishing rate, and shale oil will be difficult to "free-ride" in this case. In addition, due to the relatively limited space for cost squeeze, the sharp reduction in this round of capital expenditure will be more directly reflected in the decline in drilling activities, suggesting an intensified risk of a decline in U.S. crude oil production.
"Some countries in Europe and the United States have implemented strict isolation and lockdowns for nearly a month. However, the slow decline in the number of new cases may extend the lockdown period, and there is still great uncertainty when demand can start. Before demand recovers, active or passive production cuts will play a certain positive role in delaying the expansion of inventory caused by rapid rise in inventory, but they are not enough to support a sharp rise in oil prices. The reason is that the rapid rise in oil prices may lead to lower production cuts in oil-producing countries, including the United States, to lower the expected results, making the rise unsustainable. We believe that the core driving force for the trend rise in oil prices lies in the recovery of demand." An Ziwei said.
Jinrui Futures Energy Chemical Analyst Hu Yue said that the current market focus will still be on whether the newly reached production cut agreement can effectively alleviate the increasingly tense inventory pressure.
"From the recent performance of US oil companies, their production cuts may be more positive than market expectations. In the future, we need to continue to pay attention to production cuts, especially the US shale oil production cuts and the global refinery starts.Overall, although the sluggish refinery operating rate will keep oil prices under pressure from high inventory, we believe that space below oil prices is limited before the production cut agreement is advanced and the effect has not been falsified. "Hu Yue said.
US crude oil futures plummeted nearly 20% this week! Behind the "super" futures premium: inventory will soon fill up
FX168 Financial News Agency (Hong Kong) News Crude oil prices suffered a critical hit this week. Although the historic OPEC+ production cut agreement brought good news at the beginning of the week, the good times did not last long. With the increase in US crude oil inventories, the tight remaining inventory space and a record decline in crude oil demand, the three put pressure on the three, which hit the crude oil futures price hard. US crude oil futures prices closed down on Friday, setting their lowest closing price in 18 years, and fell nearly 20% this week.
US crude oil futures prices fell to the beginning of 2002 The lowest level, but this week it attracted investors' attention to the spread between near and far months.
(Source: FactSet)
WTI crude oil futures prices are already far higher than the spot market price, a situation called futures premium (contango), which encourages traders to store oil.
Strategic "The historical futures premium reflects that it is difficult to find buyers in spot crude oil and is being sold at low prices," said Michael Lynch, president of Energy & Economic Research. This means that inventory may be fuller than expected, or buyers are expected to be full soon. ”
According to Dow Jones market data, the spread between the delivery contracts in the first month and the next month on Tuesday was the largest since February 12, 2009. Data showed that WTI crude oil futures contracts in recent months were $14.45 lower than the September contract.
According to the monthly report released by the Organization of Petroleum Exporting Countries on Thursday, “In March this year, the maturity structure of all crude oil benchmark contracts showed a super futures premium, as large-scale oil demand damage, significant production cuts in refineries and the increasing global oil supply are expected to bring huge surplus to the oil market. Market inventories are expected to reach around 15 million barrels per day in the second quarter, driving further declines in spot prices. ”
On Friday, the settlement price of WTI crude oil futures for May delivery on the New York Mercantile Exchange was $18.27 per barrel. The contract price in June was $28.08 and would become a spot month when it expired in May.
IHS Markit Energy Markets Analyst Marshall Steeves noted that the WTI contract price in May is below $20 but will expire next Tuesday, while the June contract price is around $25, and by this fall, the price curve will return to around $35. The biggest cuts in
OPEC and its allies are “in May and June, when lockdowns in the U.S. and elsewhere are expected to continue and then slowly lifted,” Steeves told MarketWatch.
OPEC+ reached an agreement on April 12, deciding to start from May 1 to On June 30 this year, crude oil production was cut by 9.7 million barrels per day. After that, the total production cuts from July 1 to December 31 will drop to about 8 million barrels per day, and between January 1, 2021 and April 30, 2022, it will drop to 6 million barrels.
Steeves said that before the cuts, WTI crude oil futures prices have fallen recently due to "at-home orders in the northeastern states and some other places", which means oil demand will fall further.
Brent crude oil as the global benchmark (Brent) Crude) The spread between recent contracts and forward contracts is not as large as WTI crude oil. June Brent crude futures closed at $28.08 a barrel on Friday, and futures contracts delivered in October closed at $35.95. David Winans, head of U.S. investment-grade credit research at the fixed income division of
PGIM, said: "Brent crude is a water transport crude oil, not as restricted as WTI Cushing Intermediate or WTI Midland crude oil. WTI is an inland crude oil that can be stored in less places, so the closer it is to the ‘top of tank’, the lower the price of WTI will be in the near future. ”
Rabobank commodity strategist Ryan Fitzmaurice said crude oil inventories at the New York Mercantile Exchange crude oil delivery center in Cushing, Oklahoma reached 55 million barrels of oil. He added that while the operating capacity was said to be slightly below 92 million barrels, the record was 69 million barrels set in April 2017."
Fitzmaurice said: "There is 14 million barrels left to set a new record for Cushing crude oil inventories, and 37 million barrels left to reach its maximum capacity. At the current rate of about 5 million barrels per week, Cushing's crude oil stocks will be full in less than two months. "
What makes people even more difficult is that U.S. crude oil supply has climbed for 12 consecutive weeks, with EIA data released, an increase of 19.2 million barrels in the week ended April 10, the largest single-week increase on record. While
supply increases, demand is expected to decline this year due to efforts to reduce the spread of COVID-19. The International Energy Agency (IEA) estimates that global daily oil demand will drop by 9.3 million barrels this year, equivalent to a 10-year increase.
Winans told MarketWatch: "This extreme futures premium reflects market expectations that the current total crude oil supply will be resolved by itself. "However, "the imbalance is so large in the short term that the U.S. oil reserves may be exhausted, which will really drive oil prices lower in the short term. ”
Source: Securities China, FX168
