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10/1/2020 Oil prices dip below zero as producers forced to pay to dispose of excess | Business | The Guardian

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Oil prices dip below zero as producers forced to pay to dispose of excess

Jillian Ambrose

US crude fell to negative value for first time in history as stockpiles overwhelmed storage facilities, before rebounding to just over $1 on Tuesday

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A record 160m barrels of oil are currently being stored in oil tankers outside the world’s shipping ports. Photograph: US Department of Energy/EPA

US oil prices turned negative for the first time on record on Monday after oil producers ran out of space to store the oversupply of crude left by the coronavirus crisis, triggering an

historic market collapse which left oil traders reeling.

The price of US crude oil crashed from $18 a barrel to -$38 in a matter of hours, as rising stockpiles of crude threatened to overwhelm storage facilities and forcedoil producers to

pay buyers to take the barrels they could not store.

The market crash underlined the impact of the coronavirus outbreak on oil demand as the global economy slumps.

On Tuesday prices rebounded above above zero, with the US benchmark West Texas Intermediate for May changing hands at $1.10 a barrel after closing at -$37.63 in New York on Monday.

The rapid market decline of recent weeks had reached fever pitch on Monday as traders reached their last day to trade oil for delivery in May before the contracts expire. The

deadline triggered a collapse in prices as desperate oil traders with more crude than storage space were forced to take action.

Daniel Yergin, a Pulitzer-winning oil historian, said: “The May crude oil contract is going out not with a whimper, but a primal scream.”

The price of oil from the US shale heartlands has been declining steadily in recent weeks following the biggest slump in oil demand for 25 years steps due to restrictions on travel

to curb the spread of Covid-19. The fall accelerated amid rising fears that the global economy may be facing its deepest downturn since the Great Depression.

Oil producers have continued to pump near-record levels of crude into the global market even as analysts warned that the impact of the coronavirus outbreak would drive oil

demand to its lowest levels since 1995. The emergence of negative oil prices is expected to prompt some oil companies to hasten the shutdown of their rigs and oil wells to avoid

plunging deeper into debt or bankruptcy.

The collapse will come as a blow to US President Donald Trump who took credit for brokering a historic deal between the Opec oil cartel and the world’s largest oil producing

nations to limit the flood of oil production into the market. The pact to cut between 10 million and 20 million barrels of oil from the market from next month was dismissed by many within the market as “too little, too late” to avoid a market crash.

At his daily White House briefing, Trump described the negative price as a “short-term problem”. He said the US was filling up its strategic reserves: “If we could buy it for

nothing, we’re gonna take everything we can get,” he said.

The Guardian reported over the weekend that a record 160m barrels of oil was being stored in “supergiant” oil tankers outside the world’s largest shipping ports, including in the US Gulf. The last time floating storage reached levels close to this was in the depths of the financial crisis in 2009, when traders stored more than 100m barrels at sea before

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10/1/2020 Oil prices dip below zero as producers forced to pay to dispose of excess | Business | The Guardian

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offloading stocks when the economy began to recover.

Historically weak oil markets are likely to bring lower prices for drivers at service station forecourts, but the price collapse will also hurt pension savings which are often invested

in major oil companies through funds which track equity markets. The oil price crisis has already wiped billions from the market value of the largest oil companies, many of which will not be able to pay dividends if the market rout drags on.

Brett Fleishman, from climate campaign group at 350.org, said the collapse of oil prices is “another powerful example of how fossil fuels are too volatile to be the basis of a

resilient economy”.

“We are experiencing an unparalleled upending in our economies. And it is time for the fossil fuel industry to recognize that, from now on, the cheapest and best place to store oil

is in the ground,” he said.

“While this recession shows us that we desperately need sustainable, resilient, and stable economic systems, based on renewable, accessible and just energy sources, the fossil

fuel industry is not only trying to profit off of the current chaos, but continues to drive us further into climate breakdown,” Fleishman added.

Oil prices began to rise again on Tuesday as oil traders turn their attention to trading oil for delivery in June.

The US oil market - known in the industry as the West Texas Intermediate price - is expected to trade above $20 a barrel this week, recovering from its slump into negative

territory. The international oil price benchmark, known as Brent crude, is trading at around $26 a barrel.

The recovery is expected to pick up over the second half of the year as tight restrictions on travel to help curb the spread of the virus are lifted, raising demand for fuels and oil. At

the same time supply is expected to dwindle due to the historic deal to limit oil production and the financial collapse of weaker oil companies.

However, most analysts believe that oil prices will fail to reach the same price levels recorded at the beginning of the year before the outbreak. Brent crude reached highs of

almost $69 a barrel in January before plummeting to less than $23 a barrel at the end of March. Many market experts predict the price of Brent will remain below $50 a barrel this

year.

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10/1/2020 Oil prices dip below zero as producers forced to pay to dispose of excess | Business | The Guardian

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Case: 1:20-cv-04028 Document #: 26-6 Filed: 10/02/20 Page 4 of 6 PageID #:249
10/1/2020 Oil Prices: Looking Beyond the Headlines | SEI

https://seic.com/knowledge-center/oil-prices-looking-beyond-headlines 1/2

The West Texas Intermediate (WTI) crude oil May futures contract settled below -$37 per barrel on April 20, the first time ever the oil benchmark had fallen negative. While this news may seem dire, the story is far more nuanced and complicated than the headlines suggest.

Perplexing Phenomenon

Oil markets have seen significant volatility since the start of the year, but this was an unprecedented event. Even so, it’s important to understand the event in order to

put it in perspective.

To sum it up, speculators and investors buy and sell oil futures contracts with the goal of increasing or reducing oil exposure in their portfolios. It’s important to note

that, unlike other futures contracts with cash settlement options, owners of the NYMEX WTI futures contract at expiration are obligated to take delivery of the physical

oil, which can be difficult and costly to store.

Each contract is for 1,000 barrels of oil. Accordingly, most investors ultimately sell the position before the contract expires and, if exposure is still desired, buy a new

contract in the next, or some future, expiration date.

It’s also important to know that WTI is typically extracted from the Permian Basin in Texas and sent to Cushing Oklahoma via pipeline. Its price is set based on delivery

and settlement in Cushing — this is the physical oil market. When Cushing ran out of storage space, the price collapsed. This does not mean the price collapsed

everywhere or that gas stations will soon be paying drivers to put gas in their cars.

Bottom Line

On April 20, the May futures contract traded in positive territory for the most of the day, and it wasn’t until the trading period neared the close that prices ultimately went negative. The negative price was primarily driven by panicked oil traders who were willing to pay to sell their contracts to avoid having to take physical oil delivery.

The decline (a price drop of more than 300% on April 20) only occurred on futures contracts for May delivery of WTI crude oil; contracts expiring in later months also

declined although not to the same extent.

HISTORIC DECLINE

Source: Bloomberg

WTI Futures Settlement Prices ($/bbl) 04/17 04/20 04/21

May Contract 18.27 -37.63 10.01

June Contract 25.03 20.43 11.57

Given the COVID-19 pandemic-driven collapse in the demand for oil, producers have stockpiled excess oil supply in storage facilities and tankers (not just in Cushing),

and this capacity of appropriate storage is nearly full. This combination of abundant supply, weak demand and storage scarcity sets the stage for violent movement in

prices. In other words, all is not well in the oil patch.

Oil Prices: Looking Beyond the Headlines

May 8, 2020

Oil made the news with headlines about its price falling into negative territory. It’s important to understand the event in order to put

it in perspective.

• Oil made the news with headlines about its price falling into negative territory.

• Despite anticipated near-term volatility, we expect this imbalance to work itself out.

• SEI continues to believe that commodities have an important role to play in strategic asset allocation.

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10/1/2020 Oil Prices: Looking Beyond the Headlines | SEI

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Our Strategies

The commodity-driven strategies within the SIMT Multi-Asset Accumulation Fund, SIMT Multi-Asset Inflation Managed Fund and SIIT Multi-Asset Real Return Fund did

not have exposure to the WTI May contract on April 20. Our managers are actively positioned along varying contract tenors further out on the WTI futures curve. This

curve diversification has always been used and is something that differentiates our activelymanaged exposures from an indexed approach.

Our View

We anticipate a continuation of volatility in these near-term oil contracts given the finite amount of storage available and weak oil demand. However, we also expect this

supply/ demand imbalance to work itself out in the months ahead as production is anticipated to continue to decrease in order to correct the imbalance and demand

begins recovering as lockdown measures ease. Long-Term Outlook Leaving the shorter-term outlook aside, SEI continues to believe that commodities (and not just oil)

have an important role to play in a strategic asset allocation. Commodities have historically demonstrated a low correlation to many other asset classes, providing

additional portfolio diversification, and the potential to hedge somewhat against unexpected inflation and event risk.

Along with the overarching principles of diversification and having a realistic appreciation for the uncertainty of any outlook or forecast, we believe there is ample

justification for maintaining commodity exposure as part of a long-term investment plan.

Important Information

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of

future results. This information should not be relied upon by the reader as research or investment advice. Holdings are subject to change. Current and future holdings

are subject to risk.

Index returns are for illustrative purposes only and do not represent actual investment performance.

Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past

Performance does not guarantee future results.

Investing involves risk including possible loss of principal. Diversification may not protect against market risk. International investments involve risk of capital loss from

unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.

Commodity investments and derivatives may be more volatile and less liquid than direct investments in the underlying commodities themselves. Commodity-related

equity returns can also be affected by the issuer’s financial structure or the performance of unrelated businesses. Derivatives are subject to market risk, leverage risk,

correlation risk and liquidity risk. The use of leverage can amplify the effects of market volatility on the Fund’s share price and may cause the Fund to liquidate

positions when it would not otherwise be advantageous to do so. The Funds are non-diversified.

For those SEI products which employ a multi-manager structure, SIMC is responsible for overseeing the sub-advisers and recommending their hiring, termination, and

replacement. SEI Investments Management Corporation (SIMC) is the adviser to the SEI Funds, which are distributed by SEI Investments Distribution Co. (SIDCO). SIMC

and SIDCO are wholly owned subsidiaries of SEI Investments Company.

To determine if the Funds are an appropriate investment for you, carefully consider the investment objectives, risk factors and charges and expenses before investing.

This and other information can be found in the Fund’s full or summary prospectus, which can be obtained by calling 1-800-DIAL-SEI.

Read the prospectus carefully before investing.

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