OPINION: Bottom has fallen out for WTI oil prices: close watch on Brent futures for Guyana

Bobby Gossai, Jr.

West Texas Intermediate crude turned negative today, reaching the lowest on record with its seventh consecutive decline and the biggest fall on record. Chevron and Exxon led losses in the blue-chip index as West Texas oil futures expiring Tuesday turned negative, primarily because of the end of the May contract forces physical receipt at a time when storage capacity is low. June prices fell below $23 a barrel.

This contango has shown that the fundamentals of the crude oil trading market are impacted by the key factors of demand, supply, inventories, and the financial market. In a time of the global pandemic and how tight the global term structure is for the oil market; this is a phenomenon that we are seeing for the first time. The health of the oil market is being tested here and for the emerging oil and gas producing and exporting sector of the Guyanese economy, the country must review its current operations and the fiscal structure that will be aimed at a level of protection for both the operators and the revenues that will be impacted on behalf of the country.

The producers of Guyana’s crude will be looking towards the futures of the Brent market in May and June to have some level of stabilisation around US$20 per barrel to ensure that profitability is good for long-term production and expansion.

Today is an unprecedented day of trading, the price for the May contracts wiped out all value, breaking every low for oil prices since 1946. The exchange where WTI futures trade said the contract would be allowed to price below zero. The extreme move showed just how oversupplied the U.S. oil market has become with industrial and economic activity grinding to a halt as governments around the globe extend shutdowns due to the swift spread of the coronavirus. An unprecedented output deal by OPEC and allied members a week ago to curb supply is proving too little too late in the face a one-third collapse in global demand.

There are signs of weakness everywhere. The fall in the growth of China’s Gross Domestic Product for the first time in decades is a clear indication that the demand for the western crude oil is below that level than which was expected. The fall in the demand from the emerging economy of India has also compounded the negative impact of the low demand on the oil price market.

Global oil demand is expected to fall by a record 9.3 mb/d year-on-year in 2020. The impact of containment measures in 187 countries and territories has been to bring mobility almost to a halt. Demand in April is estimated to be 29 mb/d lower than a year ago, down to a level last seen in 1995. For 2Q20, demand is expected to be 23.1 mb/d below year-ago levels. The recovery in 2H20 will be gradual; in December demand will still be down 2.7 mb/d y-o-y.

Therefore, even though oil started the year at US$60, which allowed for greater revenues to be earned in Guyana by both the operators and the country, from the first sets of exports, this trend has now been wiped out. Hence, if the price of oil bounces back tomorrow, the catch-up race and the margin calls for Brent will not see a strong come-back in the short-term to a level of better normalcy. This will take more than two consecutive growth period for the oil market to effectively bounce back to a state of where new economies like Guyana and new producers in this region are able to increase their CAPEX (capital expenditures).

However, as a new oil producer and exporter on the dated-Brent, Guyana will have to ensure that the futures of trading are mitigated by the options market. The government, operators and traders must explore the best set of possibilities for the future of the oil trading market.

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Bobby Gossai, Jr. is currently pursuing the Degree of Doctor of Philosophy in Economics at the University of Aberdeen with a research focus on Fiscal Policies and Regulations for an Emerging Petroleum Producing Country. He completed his MSc (Econ) in Petroleum, Energy Economics and Finance from the same institution, and also holds an MSC in Economics from the University of the West Indies. Mr. Gossai, Jr.’s professional experiences include being the head of the Guyana Oil and Gas Association and senior policy analyst and advisor at the Ministry of Natural Resources and Environment.