Can Brent Crude Oil Follow WTI Into Negative Territory? You Bet

Monday’s plunge in U.S. crude futures intonegative territory has raised an obvious question in the oil market: can the global Brent marker do the same?

The answer is yes.

ICE Futures Europe Ltd.confirmed on Tuesday night that it’s preparing various Brent prices for just that possibility if there’s demand to do so — even if there’s still a long way to go before that happens, since June contracts are trading at about $20 a barrel. Beyond the mechanistic side of negative pricing there’s also market reality: the world’s storage sites arefilling with crude fast — the precise concern that caused West Texas Intermediate to turn negative.

“In the North Sea, the ships operate as a pipeline, so are there enough vessels to enable the flow of oil?” said Jorge Montepeque, president ofGeneral Index and the man who helped shape the way oil prices are assessed globally when he was a boss at S&P Global Platts. “If there isn’t, you will need to pay ever increasing prices for the ships, which results in a lower and lower price of the oil.”

That pressure on the tanker fleet is building right now. Well over100 million barrels of oil is now being held in floating storage — by another estimate more thantwice that. According to Belgian vessel owner Euronav NV, one of the world’s largest, the dynamic is driving freight rates ever higher — a trend the firmdoesn’t see reversing any time soon.

Places to keep supplies are diminishing globally. With on-land sites either completely booked up or filling fast, there’s still pressure on Brent, even if it’s more dispersed than for WTI. Barrels may keep flowing for longer than they should, too, because stopping and starting wells is no easy task.

“If there is a technical reason why you cannot shut in the well, then the oil production that you have to sell will have to clear in the market, which can be a negative price,” Montepeque said.

There’s another important difference between the two contracts. While the Brent futures contract is cash settled against the value of the Brent index price, the WTI contract is physically settled, meaning a trader must take delivery of barrels of oil at Cushing in Oklahoma, hundreds of miles from the coast.

While this means that WTI can become pressured if there’s perceived strain on storage at the U.S. hub, there’s also a fast-building glut in the rest of the world.

So Brent can, in theory at least, go negative. The real question is whether production will be scaled back sufficiently before that possibility becomes a probability.

— With assistance by Alex Longley, and Laura Hurst

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