'Minus Oil Price' Shock Hits... "Considering Early Production Cuts and Strategic Reserve Expansion"

Oil Storage Limits Amid Oversupply Concerns
"Profitable to Stockpile Oil, but No Storage Space"
WTI May Delivery Nears Expiry, Crashes
Saudi May Advance Production Cut Schedule
US Considers Strategic Petroleum Reserve Stockpiling

[Asia Economy Reporter Naju-seok] International oil prices, which had been declining continuously, have plunged into negative territory, intensifying the shock to the global economy. Oil producers are now forced to sell crude oil at a loss just to dispose of their inventories. Although unprecedented negative oil prices appeared during futures trading, market conditions are challenging in the short term, leading to forecasts that the downward trend in oil prices is inevitable.

Negative oil prices symbolically reflect how the global economy has come to a halt due to the novel coronavirus disease (COVID-19). Demand remains sluggish while crude oil is oversupplied, creating a situation where finding storage space is increasingly difficult.

However, the drop of West Texas Intermediate (WTI) crude oil prices into negative territory is largely considered temporary, as it coincided with the 'futures expiration event' rather than reflecting the overall market condition. Futures investors, ahead of the May WTI contract expiration on the 21st, chose to roll over their positions to June contracts instead of taking physical delivery of the oil.

[Image source=Yonhap News]

CNBC explained, "Although oil prices appear negative on the surface, the actual situation is not as bad as it seems." The June-delivered WTI fell sharply by 16% but closed at $21.04 per barrel. Therefore, many expect oil prices to quickly recover to around $20 once the May contract expires.

Market experts describe the current situation as a super contango. Contango refers to a market condition where futures prices for later delivery are higher than those for near-term delivery, typically with a price difference of 40 to 50 cents per barrel. In contrast, super contango indicates a price gap exceeding $10.

Market participants explain that the exceptional super contango phenomenon reflects expectations that demand will somewhat recover by this fall. If oil can be stored and held, significant profits can be made. Reid Ianson, an economist at Kepler, an oil data provider, stated, "If there is storage space for oil, it is a situation where money can be made."

As a result, charter rates for Very Large Crude Carriers (VLCCs) have also skyrocketed. A VLCC, capable of carrying 2 million barrels, had a daily charter rate of $29,000 for a six-month contract just a year ago, but now the rate has surged to around $100,000.

Following the sharp decline in oil prices, oil-producing countries have also accelerated their actions. The Wall Street Journal (WSJ) reported that Saudi Arabia is considering advancing its scheduled production cuts. Originally, OPEC+ (the Organization of the Petroleum Exporting Countries (OPEC) members and non-OPEC allies) planned to reduce daily crude oil production by 9.7 million barrels starting from the 1st of next month, but they are now reviewing the possibility of moving up the schedule.

Saudi Arabia's immediate production cut decision is reportedly contingent on existing contracts with buyers and Saudi domestic laws.

The United States is also considering increasing its crude oil reserves. Steven Shock, editor of the oil market-focused newsletter Shock Report, predicted, "Within two weeks, storage capacity in the U.S. will be full." U.S. President Donald Trump said, "Right now, (oil prices) are at a very interesting level for many people," adding, "We plan to fill the Strategic Petroleum Reserve. We are considering filling 75 million barrels."

Earlier, the U.S. Congress excluded funding for the Strategic Petroleum Reserve in the $2.2 trillion economic stimulus package. Regarding this, President Trump said, "Now is a good time to buy (oil)," and "Congress will approve it." He also mentioned that a plan to block oil imports from Saudi Arabia is under consideration.

This content was produced with the assistance of AI translation services.