The oil story so far

APRIL has been the most volatile month in the history of oil trading.

The Nymex West Texas Intermediate (WTI) crude oil futures dived into negative territory, driven by weak demand and ample supply amid the coronavirus (Covid-19) pandemic. However, the most worrying part was the lack of storage capacity.

The crude oil storage issues are not limited to the United States, it is a global issue. Apart from the US oil futures, its counterpart, Brent crude oil, also fell as low as US$15.98 per barrel in April, its slowest since June 1999, reports say.

Thanks to Opec+’s move to cut oil production by 9.7 million barrels per day from May onwards, global oil supply is set to fall by a record 12 million barrels per day in May.

Maybank Investment Bank Research (Maybank IB) says based on the recent first-quarter results, some oil companies’ earnings have fallen into the red. Some have started to cut dividends, reduce operating expenditure and suspend share buybacks as they preserve cash. For the second quarter, the results will be worse.

Most, if not all of them, cannot survive and operate at the present low oil price (subus$30 per barrel) level, and shale players are set to be the most vulnerable in this downturn, for their capital structures are heavily loaded with debt, Maybank IB says.

Moody’s Investors Service adds that while drastically lower oil prices will hurt Asian national oil companies, sovereign support will continue to underpin their credit quality.

The inflection point is in the third quarter, as major economies begin to open up, but for demand to normalise, it may take up to 24 months. Morgan Stanley believes Brent will be at US$35 per barrel in the fourth quarter of this year.

Amid the oil crisis, Maybank IB says there are some standout stocks for the picking – those that are resilient in a down cycle.