Crude oil prices go negative in historic crash New York | Energy traders bailed out of the expiring May US oil futures contract in a frenzy on Monday, sending the contract to a record of -$US37.63 (-$59.27) a barrel or a fall of more than 300 per cent at 5.26am AEDT as few buyers are willing to take delivery of actual physical barrels of oil because there is no place to put the crude.

With demand down 30 per cent worldwide due to the coronavirus pandemic, and the main US storage hub in Cushing, Oklahoma expected to fill up in a matter of weeks, very few want to be stuck with oil barrels that they have to take delivery on at some point during May. Major oil producing nations have agreed to cut output and global oil companies are trimming production, but those cuts will not come quickly enough to avoid a massive clog.

Wall Street could retest their lows once more.

"The cavalry [OPEC-plus cuts] wont arrive in time to save this oil market. This may prove to be one of the worst deliveries in history. Nobody wants or is in need of oil right now," said Phil Flynn, senior market analyst at Price Futures Group in Chicago.

The difference between the expiring May US West Texas Intermediate crude contract and the coming June contract widened to a record at nearly $US20 a barrel. That yawning gap emerged because owning the May contract when it expires on Tuesday means that buyer is obligated to take those barrels.

As a result, futures traders, who would normally be able to shift from the expiring contract to the next, are finding few buyers for the expiring May contract to take delivery of barrels. As more traders dump the May contract, it has crashed, lately trading at less than $US6 a barrel.

"For many investors or people using these contracts for hedging this is really a big pain," said Edward Moya, market analyst at OANDA in New York. "There's no place to put it - we're running out of space to store oil."

When a futures contract expires, traders must decide whether to take delivery or roll their positions into an upcoming contract. Usually this process is relatively uncomplicated, but the May contract's decline reflects worries that too much supply could hit the markets, with shipments out of OPEC nations like Saudi Arabia booked in March set to cause a glut.

As the world wakes up to the catastrophic impact of climate change, scientists have warned of a need to rapidly shift away from fossil fuels.

Available storage space is dropping fast at the Cushing, Oklahoma hub, where physical delivery of US oil barrels bought in the futures market takes place. Four weeks ago, the storage hub was half full - now it is 69 per cent full, according to US Energy Department data.

"Its clear that Cushing is going to fill and it will stay full for the next several months," said Andy Lipow of Lipow Oil Associates. "Because producers have been lagging in their production cuts were seeing an overwhelming amount of crude oil looking for a place to go around the world."

Crude stockpiles at Cushing rose 9 per cent in the week to April 17, totalling around 61 million barrels, market analysts said, citing a Monday report from Genscape.

The world's major oil producers agreed to cut production by 9.7 million bpd (barrel per day) in an attempt to get world supply under control as demand slumps, but those cuts do not begin until May. Saudi Arabia is ramping up deliveries of oil, including big shipments to the United States.

Worldwide oil consumption is roughly 100 million barrels a day and supply generally stays in line with that. But consumption is down about 30 per cent globally, and the cuts so far are far less.

US exchange-traded funds are also playing a role in the action, analysts said. The US Oil Fund LP, the largest crude oil ETF, said on Thursday that it would start moving some of its assets into later dated contracts earlier in the life of the monthly contract.

Source: C Nivedita and Shreyashi Sanyal, Australian Financial Review, 21st April 2020

Required:

Based on the above article, would you recommend Petroliam Nasional Berhad (an oil producer), to hedge its exposure to oil price risk, given the current environment? What factors need to be considered when making your recommendation to Petroliam Nasional Berhad? (350 words)

Irrespective of your answer to (a), assume you are required to hedge crude oil price risk, between futures, forwards and options (single and multiple option strategies) which strategy/instrument would you choose and provide the reason for your choice above all other strategies. (350 words)