With dampened demand due to the coronavirus outbreak, oil firms have been renting tankers to store surplus which has sent US oil prices into the negatives during Monday night trading. This is uncharted territory.
US’ benchmark, the West Texas Intermediate (WTI) crude, went down to nearly minus US$40 per barrel. WTI’s June prices is also down but it was still trading above $20 per barrel. Brent crude, the international benchmark was also down by 8.9 per cent despite already trading at June prices, which is less than $26 per barrel. WTI will start trading at June prices on Tuesday.
Avin Sony, head of Institutional Sales at Asia Plus Securities, said investors do not need to look at WTI futures for now because it will have no value until demand comes back.
“The main point here is that yesterday’s negative oil prices on May contracts hardly has any implications to Thai or Asean producers,” he said. “We neither buy US crude and we don’t sell to US refiners and our prices are not linked to what happens in WTI,” he added.
He said Thai prices are based on Brent and Dubai prices which have been more stable throughout the outbreak and the oil price war. Their storage facilities is not as full and the outbreak severity is not as bad as in the US.
He expects a similar drop in US oil prices as OPEC’s production cuts will not kick in until the start of May; and it is a small cut. The key will be the US producers who need to shut down, but shutting down is expensive and the cost of getting it back up and running is even higher.
“Optimism that demand will snap back after the end of lockdowns means equity prices will remain elevated,” Sony said. “The drop in oil prices has led to significant reduction in capital expenditures which means that the market will eventually balance out as market forces will push higher cost producers out.”
Dow Jones was down by 2.44 per cent on Monday while S&P500 and Nasdaq were also down by 1.79 and 1.03 per cent respectively. The baht has weakened from the opening of 32.51 baht per US dollar on Tuesday to 32.59 as of 9:30am, as people rush to buy the greenback amid the drop in oil prices.
CGS-CIMB Securities (Thailand) expects the Stock Exchange of Thailand (SET) to trade down along with other Asian bourses on Tuesday as Dow Jones lost more than 600 points on Monday.
The firm noted that oil price futures have traded up this morning with WTI futures race back up to $1.64 per barrel and $25.78 per barrel from Brent futures as of 9:30am on Tuesday. They expect trading on June prices should not be as bad as May prices as demand is expected to pick up in June.
Apart from pressure from oil shares, the SET will also be hit by bank shares as Kasikorn Bank’s first quarter result for 2020 came out worse than the market expected and investors are selling them for profit. CGS-CIMB Securities noted that investors should be keeping an eye on the first quarter results from other banks as well.
They also pointed out that the government’s easing up on lockdown measures has been absorbed by the market so there will be more incentive to sell for profit. However, the Cabinet will meet on Tuesday to discuss more measures, such as the lowering of electricity price for households, and other measures to ease up the lockdown would be considered.
As a result, CGS-CIMB Securities sees the index at the range of 1250-1280 on Tuesday from the closing of 1266 points on Monday.
