Oil prices unlikely to bounce back soon

By Lee Kyung-min

Oil prices are not likely to pick up anytime soon due to a lack of substantial production cuts to curb the market oversupply amid the continued power struggle between major oil producers, industry watchers said Tuesday.

Experts said that petrochemical businesses will see a modest turnaround thanks to reduced unit cost, but improvements in the sector will be limited as they could be offset by a rapid deterioration in the refinery businesses hit by the unprecedented demand shock brought on by COVID-19.

The outlook came after U.S. crude oil prices turned negative for the first time in history Monday (local time) as oil producers ran out of space to store the rising stockpiles of crude left by the coronavirus crisis. The price turning negative means that anyone trying to sell oil will have to pay buyers to take it. For example, a price of -$30 (37,000 won) per barrel would mean sellers would give buyers $30 to take a barrel of crude oil.

The price of U.S. crude crashed to -$38 a barrel from $18 in a matter of hours, as storage facilities close to being overwhelmed forced oil producers to pay buyers to take the oil they could not store.

The U.S. benchmark West Texas Intermediate (WTI) closed at -$37.63 in New York, Monday. The prices rebounded above zero, Tuesday.

“The oil price shock in the U.S. is expected,” Korea Energy Economics Institute (KEEI) oil policy research team head Jung Jun-hwan said.

The futures oil contracts for May delivery saw no buyers as many investors ditched them and instead bought those for June delivery in what is called a “rollover” in industry terms.

With the May contract set to expire Tuesday (local time), oil not being taken into possession by buyers had nowhere else to go. Amid already overwhelmed storage, the price fell through the floor.

Yet, contracts for June delivery were still trading for about $22 a barrel, down 16 percent for the day.

“The difference in price between WTI and the global benchmark Brent crude which hovers around $25 per barrel is about $10, which shows the U.S. market is experiencing unusually severe turbulence,” Jung said.

The plunge in oil prices means reduced manufacturing costs for Korean petrochemical businesses, which according to market consensus is expected to see some improvements in earnings reports in the second quarter.

But corporate outlook remains grim for other refinery businesses as they are reeling from demand shock caused by lockdowns and travel restrictions.

While about half of the refined goods are exported mostly to the Asia-Pacific region including China, Australia, Singapore, Japan, Taiwan and Vietnam, these countries will not need oil unless the economies in the U.S. and Europe pick up.

“It all comes down to how fast the virus is brought under control,” Jung said. “Without recovery, oil will have no place to go.”