Historic Day for WTI Crude Oil Negative WTI Crude Oil for the first time in history 21 April 2020

■ As we noted in our quarterly market insights publication last month, the of oil has experienced a dramatic fall and entered a bear market, on the back of significantly weaker global demand due to the impacts of COVID-19 as well as increased supply as a result of price wars between Russia and Saudi Arabia.

■ Overnight, we saw the price of a barrel of West Intermediate (WTI) fall to as low as circa US$(37.63), in unprecedented negative pricing territory that is bound to go down in history.

■ The negative pricing could be considered as a glitch in the market as traders made a dash for the exit door to avoid being caught out holding an expiring May US oil which would require the buyers to take delivery of the physical barrels of oil.

■ The problem with this is that over the past few months, as global demand has sharply declined with increasing supply, storage capacity for oil has been filled. As a consequence it has become increasingly difficult to store landlocked sources of oil, such as WTI.

■ From a producer's perspective, shutting down a well is extremely expensive. At least in the term major producers would prefer to sell the oil, even at an operating loss, to keep the well flowing. WTI Crude Oil vs daily prices 80

60 40 US$19.78 / bbl 20 June WTI Crude Futures Price

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-20 WTI Crude Brent Crude Oil Price (US$/barrel) (US$/barrel) Price Oil -40 US$(37.63) US$25.20 / bbl July WTI Crude Futures Price -60

Jan 20 Jan Source: Bloomberg

Oct 19 Oct

Sep 19 Sep 20 Feb

Dec 19 Dec

Nov 19 Nov Mar 20 Mar Source: Bloomberg

■ Without the same storage constraints as WTI, Brent Crude is trading at around US$23.87/bbl.

■ The ~10% decline in oil supply agreed by OPEC and Russia is expected to be insufficient in the short-term to stabilise the oil market, as the global economy navigates through the impacts of COVID-19 and the resulting significant reduction in oil demand. Further supply reductions will come from other countries, particularly the US and Canada.

■ Nevertheless, it is expected that the industry should be able to restructure itself over the following months to unwind negative pricing for WTI, with the likely response required on the supply rather than the demand side. We expect to see a prolonged period of low ~100m bpd ~70m bpd ~(30)% oil prices. This may Pre COVID-19 oil balance Current level of oil demand Reduced global oil demand present an opportunity for entry into selective global oil equities ~9.7m bpd ~10% ~20m bpd benefiting from an OPEC Plus production cuts OPEC Plus production cuts Remaining oil supply surplus eventual recovery

Source: Bloomberg, Capital IQ, IEA, AFR; Note: above figures are estimates only

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1 Contacts Eden Partners

Contact Details

Nicholas Boyd-Mathews Oliver Morse Matthew Hall F Fin Chartered MCSI MSAFAA BA (Hons) CA BComm (Fina GEcon) BHComm (Econ) Executive Director / Executive Director / Executive Director / Chief Investment Officer Portfolio Manager Portfolio Manager [email protected] [email protected] [email protected]

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