Phenomenon of Negative Oil Prices

Presented by

Group 05
Md. Arshad Chowdhury 57E, 42
Divine Wealth Chakma 59D, 16
Md. Rauful Islam Sworan 59D, 30
Anika Ema 59D, 32
Record Slump of Oil Price
 On 20 April 2020, WTI Crude Oil Price hit negative territory What it means?
 Price slumped to -37.63 USD per barrel for May 2020 Futures contract
For the first time in
 Trading deadline (April 21) triggered the collapse in price
history, oil traders
would pay for taking
the oil off from their
hands!
History of Oil Price Collapse
 Reasons for Oil Price Crash
Maxing out of Onshore Storage
Shock on Demand Capacity
In March, 76% of world’s
Global oil demand fell up to
available oil storage were full
30% due to lockdowns and a record amount of 160
restrictions for COVID-19
million barrel oil is being
stored at sea
Source: International Energy Agency, 2020

Global Crude Oil Demand (mbpd*)

102
100.1 Cost of Renting Super Tankers
100 99.3
98
97.9 Exploded
96.2
96 94.9 Oil Tanker Freight Rates (USD/day)
94 92.7
March February
92
90 $20,000.
00
88
2014 2015 2016 2017 2018 2019 $300,00
*mbpd- million barrel per day 0.00

Source: Statista.com, 2020 Source: Rystad Energy

Reasons for Oil Price Crash
Saudi-Russia Oil Price War
After Russia refused to get into
an oil-production-cut
agreement with OPEC+, Saudi
Arabia started to provide
unprecedented discount on oil
• Saudi offered a discount of USD
6 to 8 per barrel
• Increased the production
up to 23%
Source: Bloomberg
Expiry of May 2020 Futures
Contracts
The price turned negative just
before the expiry date. No
one wanted to be stuck taking
delivery of oil when the world
is awash with it.
• Traders were desperate to get rid
of the May contracts
• June contract is more actively
traded closing above USD 20 per
barrel on the same day
• A better indication for the market
Major Political Events before Oil Price Plunge
Impact of Oil Price Collapse
Low Demand & Price

Low Revenue from

oil market

Impacted Groups

Oil
Investors Short-term positive impact on:
Companies
 Importers
Remittance  Manufacturing sectors
Exporter
Earners  Transport sectors
Countries
Impact on Oil Exporting Countries
Exporter Countries shouldering the most brunt

Cost of Production Budget Requirements

Oil price fiscal breakevens
Oil price needed for budget to break even ($ per barrel, 2020 projections)

KSA 85
KSA UAE
UAE 70
$2-6 $2-6
Kuwait 63

Iraq 61

Libiya 58
Russia USA
Qatar 40
$15 $23-45 0 10 20 30 40 50 60 70 80 90

Source: IMF
Impact on Oil Exporting Countries

Exporters’ Challenge
GDP growth
Balance of Payments
Exchange rates
 Petrocurrencies move along with the price of oil
 Saudi Riyal pegged against USD
 Mexico and Colombia’s pesos are each falling to
record lows
 Ruble slumped more than 10% against the
dollar
 South Africa’s rand has fallen 16%, with foreign
investors pulling out more than $4 billion

Source: India Times, March 2020

 Impact on Oil Companies

Low Earnings and Dividend Cut dividend for the 1st time since WW2 by 2/3rd

Shutdown and Shelving projects & Warned of 300 redundancies in North Sea rigs
Layoff Capital spending
Retreated from investing in $14 billion LNG
project by GNL Quebec
• Continuation of around $20 a barrel for
a while would force 80% of Whiting Petroleum, a shale operator, declared
independent oil companies into bankruptcy on March 31, 2020
bankruptcy
• Even if at $30 a barrel, many companies
would be crippled, but at least the
industry will survive Risk of takeover by large
players
(according to Scott Sheffield, chief executive of
Pioneer Natural Resources) Source: Reuters, April 2020
 Impacts on Investors and Remittance Earners

Investors: Remittance Earners:

 WB predicts a 22% decline in 2020
A staggering $86 billion debt maturity  2 lac workers returned since mid February 2020
by 2024 of North American Oil
Exploration Firms, implying a higher
default risk for the industry*

Affected return of Pension Fund

invested in Oil Industry

Hit on regional banks involved

in oil industry

*Source: Moody’s Investors Service

Effect on Stock Markets

5.04% drop
306% drop

4.80% drop
4.48% drop

Source: marketwatch.com
Effect on BD Stock Market

Despite Bangladeshi stock market having bad days, the DSE indices saw a deeper plunge during
the oil crashing days. DS30 index went down about 11% from March 13 to March 20, 2020.

Source: marketwatch.com
Coping Mechanism

Monetary Policy Fiscal Policy

Controlling budget deficit and
expenditure
• Saudi Arabia to reduce spending by 5%
• Raise Debt ceiling from 30% to 50%

 Expansionary  Coordinate fiscal  Beware of Taxation

policy & monetary existential
 Inflation
Hedging
policy threats
• Mexico purchased options from Wall
Street banks and oil majors to protect
oil revenues that valued $6.11 billion
Structural Measures
Diversification | Sovereign Wealth Fund | Supporting Private Firms

Source: Reuters (April 2020), arabnews.com (March 2020)

 Immediate Measure Taken to Stabilize the Market

Reducing the Oil Supply by Cutting Production

3-Step cut by OPEC+ countries:

• May’20 – Jun’20 : 9.7 mbpd

Global Supply Cut OPEC+ Production Cut Non-OPEC Cut • Jul’20 – Dec’20 : 7.7 mbpd

• Jan’21-Apr’22 : 5.8 mbpd

12 mbpd 9.7 mbpd 2.3 mbpd
*mbpd = million barrel per day
How Far It Will Work!
Demand fallen Production Cut
around 30% 10% Other Impacts:
Even if the production cut continues • Continuation of investment to offset natural
production declines
× Won’t rebalance the market • 32% drop of oil exploration companies’ global
 Absorb the worst hit capital expenditure in 2020
- lowering the peak of supply overhang • This will include roughly 10 million jobs
- flattening the curve of the build-up in stocks directly or indirectly involved with the industry

Forecast of demand fall (mbpd), 2020 • Saudi Arabia’s efforts to diversify its economy
to be jeopardized due to lot less earning
Forecast of Demand fall (mpbd), 2020)
• In USA, economies of states like Texas,
40
Oklahoma, North Dakota and Alaska will be
Million Barrel per Day

29
30 26 affected
20 15
• Reduction of financial resources will
10 undermine the ability of oil industries’
0
April May June
technological development needed for clean
energy transitions around the world
Source: CNBC (13 April, 2020) Source: The New York Times (27 April, 2020)
 Impact on Bangladesh Oil market
• By tapping into the opportunity of low price in international market, BPC can make around BDT
14,000 crore
• BPC to offset its previous losses by capitalizing low price
• BPC declined the scopes for revised market price of oil in Bangladesh
• Thus, no effect on local markets to offset the previous loses

• Due to sharp drop in domestic

consumption storage facilities
are almost full
• BPC looking for private
storage facilities
• United Tank Terminal storing
0.8 million tonnes crude oil

Source: ProthomAlo & The Business Standard, April 2020

Rapid Measures for Storage Capacity Upgrade

Using abandoned Installing Floating Using abandoned Petrol Pump

Using abandoned
gas field facilities Installing Floating
Oil Reservoirs onshore facilities hoarding facilities
gas field facilities Oil Reservoirs

Workover gas well There are more than

SanguPlatform
Sangu Platform Flexiblefloating
Flexible floating
facilities in Bakhrabad, 2,800 petrol pumps
connectedto
connected to storage tanks
storage tankscan bebe
can
used Titas and other gas across the country.
Chattogram with
Chattogram with usedasastowable
towable
floating reservoirs forfor fields can be used after Government can store
20-22km
20-22 kmpipeline
pipeline floating reservoirs
storage and transport quick overhauling crude on the unused
storage and transport
storage of the pumps
Source: The Daily Star, 13 April 2020
Thank You!