The 300% price drop in the West Texas intermediate (WTI) contract price for May, from USD 17.85 a barrel to minus USD 37.63 on Monday night (Singapore time), will not significantly impact the overall Singapore bunkering market, learned Manifold Times.

The Singapore bunkering publication spoke with a variety of local marine fuel consultants, traders and suppliers on Tuesday to confirm the development; they provided the reason for the historical fall in WTI oil prices, while explaining its limited impact on the sector.

Azure Strategic Resources

“Nobody has seen it [a negative WTI price] before, and everybody gets excited,” said Dennis Ho, Director & Founder of Azure Strategic Resources, a boutique consultancy firm advising mainly on commercial aspects of the marine fuels sector.

Ho explained the main reason for the price drop on the WTI benchmark was mainly due to a flurry of sellers looking to close the May WTI contract expiring on Tuesday (21 April) before delivery.

“A lot of players were taking financial contracts through ETF [exchange-traded funds] for the May contract and when the price dropped they started panicking to clear their position. The new frontline contract for WTI in June is trading at around USD 21 per barrel and will be a better indicator of market value.

“However, if one takes things into perspective the situation is an indication of a near term problem of physical U.S. based players running out of storage as even when the WTI price is negative they cannot take on additional oil in the near term.”

According to Ho, the bunkering sector will be expecting a downward correction of bunker prices on Tuesday (21 April) due to the negative value coming from the sensation of the WTI prices and lower value of Brent crude, a global benchmark for oil prices mainly referenced by players from the fuel oil and bunkering sector [instead of the US-centric WTI].

“However, the overall concern for bunkers is still the ongoing unfortunate issues surrounding Hin Leong Trading. This will negatively impact the availability of credit for the bunkering market and is a bigger concern which most players are focusing on,” he states.

“With the COVID-19 pandemic, oil prices crashing, Hin Leong issues and credit tightening, we are all right in the middle of a perfect storm and not getting out anytime soon.”

SDE International

“Physical bunker players that may have already purchase fuel or already have them in stock will definitely be affected by the fall in the oil prices,” said Simon Neo, Executive Director at SDE International which focuses on consultancy work related to the marine fuels sector.

“They may have to sell at a loss unless they are able to hold it till the oil prices goes up again; but nobody knows given the current market conditions. If suppliers hold stocks, are they willing to sell at these kind of low oil prices?

“But what most players will be concerned in today’s market is the credit crunch due to the banks’ confidence level [with the bunkering sector]. This is something which will hit the bunker suppliers more than the oil price. Even if the oil price is low, banks may not finance a deal. So, we will have to wait and see how the whole situation pans out.”

Feedback from Bunker Traders

The fall in WTI benchmark oil prices will result in limited direct disruption to Singapore’s marine fuel trading operations due to the majority trading on Brent, said traders. However, the group was wary of being indirectly affected by developments from other related sectors.

“My side isn’t expecting any drastic changes as the Singapore marine fuels market trades bunker cargo on Brent and few people look at WTI for prices. Cargo wise, Brent is much more internationally recognised,” said the Director of a Singapore-based bunker trading firm.

“In a nutshell, there is not much effect for the trading side.”

The Marine Fuels Trading Manager of a foreign based oil commodity firm believed the fall in WTI benchmark oil prices could potentially affect bunker trading houses in two ways.

“The fall of the crude oil prices affects the price of bunkers directly. Hence, the cost of bunkers is much lower now, which means our credit exposure to our clients are also reduced, which is a good thing,” he told Manifold Times in an email statement.

“However, the fall in bunker prices could mean some physical suppliers may get caught out by it and face significant losses. We have to monitor all our suppliers closely on any red flags that show them to be facing financial difficulties.”

“The Singapore bunker market is aligned more to movement on the Brent oil benchmark. So, although the WTI dropped drastically, there wasn’t drastic movement in today’s local market,” shared a Senior Trader.

“Singapore remains one of the most competitive ports in Asia. Hence, price competitiveness is a key driver to generate demand, and demand for Singapore bunkers hasn’t really dampen with the COVID-19 issues as MPA recorded steady results [from March bunker sales].

“But with various ports that have excess oil and limited inventory storage, we could potentially see depressed bunker prices which will likely pose more competition to Singapore’s current bunker prices.”

A bunker trading source at an oil major offered a view of the current situation.

“Overall market sentiments remain bearish. We are witnessing demand destruction of an unprecedented scale with planes grounded and countries on lock down. These low absolute oil prices could see banks/lenders making margin calls,” said the source.

“Immediate near-term concerns would be the potential of another set of credit crunch leading to more defaults in an already troubled market.”

The development, overall, is generally good for the bunker trading sector but speaks otherwise of the situation at large, says the Director of a bunker trading firm.

“The fall in oil prices, though for not very good reasons, produces positive effects for the bunker trading business,” he says.

“Customers pay lesser for oil; cash flow for traders will be better as we can now utilise much more than before; and credit lines exposed to clients are less.

“However, it is not surprising that some bunker suppliers have taken positions and now will need to pay margin calls to banks. If you have 50kt of inventory and you have haven’t hedged it correctly, you are screwed.”

Viewpoint from Singapore Bunker Suppliers

Local bunker suppliers generally echoed sentiments of their bunker trading peers, but additionally suggested players involved in storage operations could be negatively affected by the fall in WTI benchmark oil prices.

“WTI dropped a lot due to players having to take physical delivery of stock prior to contract expiry,” the Director of a Singapore-based bunkering firm told Manifold Times.

“Whereas, the fuel oil market in Singapore is more correlated to the Brent index. In addition, we are not affected by the expiry date. Hence, there are limitations to the effects in the bunker market by the fall in WTI oil prices.”

A management level executive at another Singapore bunker supplier believed the fall in WTI prices will unlikely affect players who have not yet taken positions in the market.

“To some extent, the issue boils down to two types of bunker suppliers in the Singapore market; entities who actually take a position and firms who don’t,” he explained.

“Players who have bought and stored cargoes on their floaters or shore storages at an earlier date will be affected.

“The bulk of bunker suppliers in Singapore are the smaller ones who don’t take position and simply buy ex-wharf, and will not face much impact due to the time difference. In fact, the decrease in prices may offer a good position for me as I can buy and supply more with the existing credit line.”

The owner of a bunker supplier whose business predominantly focuses on providing barging services for oil majors says this is the first time he has encountered negative oil prices.

“I don’t think anyone can really predict how it’s going to pan out. It’s also unclear if this was related to the closing of some contracts by the end of the month or if this is going to be a prolonged situation,” he shared.

“There will be a lot more pressure on OPEC+ countries to reach a clear and aggressive agreement to limit production. And moving forward, those who gambled in the past month or two are in for a bumpy ride.”

Photo credit: Manifold Times
Published: 21 April, 2020