The global demand for oil has dramatically dropped as people and businesses are locked away at home and most planes are grounded because of the coronavirus pandemic.
Large oil producers like Saudi Arabia and Russia are using the opportunity to get rid of US Shale oil, which has more production cost, by continuing to produce in large numbers.
Many US oil producers need crude to be between US$45 and $55 per barrel just to break even as it costs them around $30-$50 to produce a barrel of crude oil. Compared to the production cost of around $3-$5 per barrel for Saudi Arabia, one can see why US oil is in trouble.
This led to negative pricing on the US’ benchmark crude futures, the West Texas Intermediate (WTI) futures, this week as some traders were offering to pay buyers to get rid of the excess for them.
A quick look on Wednesday afternoon at 17:00pm Thai time saw the WTI crude, which is now trading on June prices, at $11.38 per barrel. The international benchmark, Brent crude, which dropped down to $25.57 per barrel on Monday, was trading at $18.80 per barrel during the same period of time.
Experts said demand is expected to be the lowest in May which is why the US oil futures have taken the unprecedented hit.
What does it mean for Thailand?
Avin Sony, head of Institutional Sales at Asia Plus Securities, said the negative oil prices in the US has hardly any implications to Thai or ASEAN producers.
“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 said.
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 are not as full and the outbreak severity is not as bad as in the US.
His view was shared by Bangchak CEO’s Chaiwat Kovavisarach who said on Suthichai Yoon’s Facebook live channel last night that such negative pricing at selling price has happened before in the past, such as in Canada and Uzbekistan before.
“Shutting down an oil pump is not like switching off a faucet,” he said. “Shutting it down and reopening it has a cost so if producers see that the oversupply is temporary, they will rather pay to get rid of the excess instead of shutting everything down.”
Chaiwat said Thailand does not buy US crude and Thai crude oil price are not referenced to WTI and the price of WTI is usually lower than Brent and Dubai crude by around $10-$15 per barrel anyway.
He said Saudi Arabia will have to find other ways to make money now if oil continues to stay around $20-$30 per barrel.
For Thai consumers, since Dubai crude price has dropped to around $16-$17 per barrel from around $20 per barrel, Chaiwat said the local retail prices should be coming down as well.
