BANK3014 Private and Investment Banking

Introduction

• Historically, oil market prices are known to be non-static.
• Countries that depend highly on oils as their main source of GDP often find themselves in a constrained corner when global oil prices drop as that creates uncertainty in National income.
• The formation of organizations such as OPEC (Organization for Petroleum Exporting Countries) has not addressed the oil prices completely.
• Amidst the Corona Virus pandemic, oil prices have declined as the production and supply exceeds demand due to low level of operation activities from consumers of oil products. Reduction in global people movement using air, and road, for instance, results in low consumption of jet fuels, diesel and petrol.
• The article reviews the impact the near zero consumption of oil products has affected the industry.
  
  

General Trend In Oil Prices

• Oil prices declined below zero mark in West Texas which is a historic event. The reduction in priced resulted from futures maturing on Tuesday, and the sellers were expected to pay buyers in-line with the futures contract. Below is an account of oil prices effects.
• Drastic drop in oil prices as shown by a barrel closing at $18.27 on a Friday and -$37.63 the following week on Monday.
• Negative prices affect deliveries anticipated in the month of May
• Prices for barrels to be delivered in June are still positive.
• Already June delivery lost 18% to close at $20.43 per barrel
• November deliveries closed at $31.66 on the same day.
• Prices of around $30 per barrel are still below the break-even point
• That implies that many producers will run operations at a loss
  
  

Effect of futures contracts

• Futures dictates the time of settlement of obligation.
• Once they expire, one party gains while the other loses depending on the prevailing oil prices.
• In the current situation, sellers will pay buyers to persuade them to offload the oil as the storage capacities are full.
• Oil prices will continue to dip as long as futures contracts are continually being executed.
  
  

Opportunities

Though the sellers are suffering, it is an opportunity for buyers with enough storage capacities to purchase the oil for speculation purposes.

As prices improve in the future, entities with huge storages will leap huge profits.

Cost implications

Leasing costs have gone up as shown in the table below

Source	1 year ago, lease cost	Current lease cost
VLCC	$29,000	$100,000
Yearlong contracts	$30,500	$72,000
Spot charter rates	$25,000	Nearly $150,000

 

• Production outputs will reduce as miners plans to manage storage costs
• Oil holding cost will remain high
• Increase in floating storage contracts has resulted in additional costs for oil companies
  
  

Conclusion

• Oil prices will be unstable as long as the production exceeds demand
• Futures traded in forex are the main threat to oil prices as they have to be implemented once the contract expires.
• Storage costs have increased by more than double

Since the prices are low, it is the best time to buy crude oil for speculation purposes.

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