Investors woke to the shocking news that a key oil benchmark turned negative in overnight trade for the first time in history. But what does this mean for ASX investors and are our energy stocks therefore worthless?
The futures contract for the West Texas Intermediate (WTI) crude to be delivered in May plunged to minus US$37.63 a barrel. This means oil producers are paying their customers to take the commodity.
You have to stand back and appreciate the moment. This could be the only moment in our lifetime to witness such a phenomenon.
Impact on ASX shares
But readers shouldn't be too surprised at the outcome. I had been writing about the possibility of this outcome since March. I even warned that the energy sector bear market could be stuck in a bear market for longer that most.
The bigger question now for investors is what do negative oil prices mean for our leading energy stocks on the S&P/ASX 200 Index (Index:^AXJO)? This includes Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH) and Santos Ltd (ASX: OSH).
It's worth noting that Oil Search is regarded as the most leveraged to the oil price.
Brent vs. WTI
But don't panic. While our oil-exposed shares are expected to tumble this morning, they aren't going to zero or turn negative (shares can't turn negative in case you are worried).
There are a few reasons for this. Firstly, these sector heavyweights aren't oil but gas producers. Gas prices aren't negative even though they tend to follow the oil benchmark with a three-month lag.
Secondly, the benchmark they follow is the European standard Brent price and not the US-centric WTI. The Brent price may have tumbled around 9% to US$25.57 a barrel but it's still in positive territory and isn't expected to invert.
More global customers use the Brent price than WTI. That is an important distinction and is the key reason why Brent is highly unlikely to turn negative. If you are wondering, the Tapis crude price used in Asia is also trading over US$20 a barrel.
Foolish takeaway
By this same token, motorists shouldn't expect petrol stations to pay you to fill up your tank! It's a very seductive thought, but sadly devoid of reality. One needs to remember that there is a cost in processing crude too.
In that respect, airlines like Qantas Airways Limited (ASX: QAN) aren't going to get free aviation fuel either, although the depressed crude price will trim fuel bills substantially.
So, while the negative oil price will be a good conversational starter at your next virtual BBQ, it isn't about to change our lives by much.
