LONDON (ICIS)–Oil futures were braced for yet another negative settlement for the WTI front-month contract on Tuesday, following Monday’s historical low, while other energy markets bowed down in response.
Historically low prices for the US oil benchmark on 20 April stemmed from a heavy sell-off ahead of the contract’s expiry on Tuesday, with bearishness intensified by storage capacity filling up, a supply glut and the ongoing demand crisis.
On Monday, May WTI settled at -$37.63/bbl, down by $55.90. At the same time, June WTI closed at $20.43/bbl, down by $4.60/bbl.
Tuesday’s trading kick-off brought WTI prices back up, but with a persistent lack of buyers, US futures slipped into negative once again. The WTI May contract hit an intra-day low of $-16.74 on its last trading session, while the ICE Brent June contract was locked in a similar, albeit not as pronounced, bearish trend with an intra-day low of $18.10/bbl.
The historical low on 20 April for WTI futures paved way for market woes that there is no price floor anymore. The world has been running out of oil storage and the 19.2m build in US oil inventories revealed last week, made the situation even worse.
Land storage in other countries is almost full to the brim and floating storage is expected to follow suit shortly. The announcement of OPEC+ massive 9.7m bbl/day cut in production combined with declines expected in US and Canadian production, made a small dent to the market’s oversupply. A steep contango lingered in the oil market.
A consistent trend reversal in oil prices may be hindered until the persistent low-demand environment created by the coronavirus outbreak, eases.
The impact of the oil crash filtered into other energy markets.
Monday’s fall in WTI prices led to the largest daily rise in Henry Hub gas prices since October 2019 on the increasing expectation that US oil production would be cut. This would also lead to a reduction in associated US gas production.
The Henry Hub price underpins US LNG export pricing and by Tuesday the May ’20 contract was priced above the British NBP and at close to parity with the Dutch TTF.
The Henry Hub has averaged a $2.90/MMBtu premium to the NBP over the past five years, which covers the US entry as an LNG exporter.
Forward price spreads through the third quarter remain insufficient to cover the costs associated with US LNG production and shipping to Europe and Asia.
A range of US LNG offtakers have already cancelled cargoes for June loading on poor economics and this could continue over the summer unless profitability increases.
Outside the US, WTI is not an important driver of global LNG spot prices. The majority of LNG trade is done within Asia, where the ICIS East Asia spot Index on Tuesday closed at a record low of $2.10/MMBtu for June as supply continued to exceed demand.
Brent crude is the most important price indexation for global LNG contractual sales. Lower Brent prices now will filter into lagged LNG contracts over the second half of the year.
European gas prices struggled with its own oversupply issues with no impact from WTI’s rampage into negative territory on Monday, but pressure fed in from weaker ICE Brent futures on longer-dated gas products.
Brent crude remains a key part in a significant number of legacy supply contracts into Europe, with movements in the global oil market often filtering through to far-curve prices. Brokered deals seen by ICIS showed the Dutch TTF Year+1 contract shedding another 2.6% of its value on Tuesday morning.
Europe, Britain in particular, is grappling with a glut of stored gas and an influx of LNG arrivals from Qatar which has pushed spot prices to lows not seen since 2006.
The concurrent uplift in US Henry Hub prices should result in fewer transatlantic cargoes through the second quarter but limited flexibility in the European market and supply from other sources should keep prices low regardless.
The drop in WTI prices fed bearish sentiment into key European power markets, but was far from being the main driver for prices reaching historic lows.
Instead a glut in European gas supply combined with lower-than-usual demand on the back of the coronavirus and mild weather to weigh on wholesale power markets.
The UK power curve continued its bearish run on Tuesday morning, with the front-month and front-season losing further value.
Traders suggested that although the weak moves in global crude futures weighed on fragile sentiment, LNG oversupply at the NBP gas market was the key driver, helping to wipe 4% from the baseload May ’20 product by 12:00 London time against its previous assessment.
Continental prices were in a similar situation, with the German front month losing around 6% from its value by midday London time on Tuesday compared with Monday’s assessment.
By: Sophie Udubasceanu
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