Uncertainty soars as oil prices plunge

United States oil prices crashed into negative territory for the first time in history as the evaporation of demand caused by the coronavirus pandemic left the world awash with the commodity and not enough storage capacity.

“There is really nowhere to store oil now and the futures market is gone negative, although it is just a snapshot in time. But the overall market is depressed,” said John Levy, a director at West Indies Petroleum Terminal Ltd, which is the island’s largest ship refueller and also sells lubricants. Fuel is cheap but the price movement remains volatile, he reasoned.

“We are traders, and we have to be careful with what we do now. We have to monitor on a day-to-day basis,” he said.

Levy indicated that it was good news for Jamaica on the surface, as it would eventually translate to lower prices. However, he indicated that it depends on the price at which Petrojam refines oil.

“Most of the fuel that’s refined and manufactured by Petrojam would have been bought in advance. The finished product is the derivative of the price they bought the feedstock at,” Levy said.

The drop on Monday was more than US$90 cheaper than the price at which Petrojam, the nation’s oil refinery, planned its 2020-21 Budget. Specifically, Petrojam projected the sale price of petroleum to average US$80.45 per barrel for this fiscal year, which compared with US$75.08 per barrel in the 2019-20 fiscal year, according to the Jamaica Public Bodies document published by the Ministry of Finance.

Queries for clarity to Petrojam sent through the Ministry of Energy were not returned up to press time.

Paid to take oil

On Monday, crude oil futures started at around US$10 a barrel, then traded higher to US$13 before crashing below par into negative territory towards negative US$13.10. It meant investors at the time, buying oil, would not only get it for nothing, but also receive cash on the deal.

Senior deputy governor at the Bank of Jamaica, John Robinson, said the central bank will be examining the matter and how Jamaica can take advantage of the plunging prices.

The BOJ, in its Quarterly Monetary Policy report, forecast oil to rise to US$60.40 for the March quarter 2020 and decline slightly to US$58.67 per barrel for the June quarter 2020. Thus, the drop below zero dollars came fast and without notice.

Data provided by the Energy Economics and Planning Unit of the Ministry of Science, Energy and Technology show that the value of total petroleum imports for 2018 was US$1.62 billion. In that year, Jamaica imported 22.2 million barrels.

Minister of Finance and the Public Service Dr Nigel Clarke, in a statement yesterday, said the Government notes the “unprecedented collapse” in world oil prices, dropping 99 per cent before going into negative territory.

He said that over the past few weeks, a small team from the ministry has been working with bankers and multilateral partners on the possibility of hedging Jamaica’s future oil supplies.

“The team has been supplied with daily prices of hedging instruments which, needless to say, reflect the significant uncertainty. That is, they have not been cheap,” the minister said.

Clarke said that the Government must make prudent decisions and would not rush.

“Had we transacted based on prices a few weeks ago, we would have regretted it today,” he said, noting that he has “tasked the Bank of Jamaica to work with the team at the Ministry of Finance to continue to review hedging options and prices and to advise the Government on next steps in a way that maximise returns on taxpayer dollars.”