The United States crude oil benchmark price; West Texas Intermediate (WTI), turned negative for the first time in market history on 20 April 2020, dropping to negative $37.63. The negative WTI prices indicated that suppliers are offering to pay buyers to deal with the oil that are supposed to be delivered in May. This means that if a customer is in a position to buy 1,000 barrels of oil from US, he would have been paid $37,630 to do so (New York Times, 21 April 2020). Crude oil suppliers are running out of space to store the excess oil caused by global coronavirus lockdown that has caused demand to collapse. Efforts to curb the spread of coronavirus have major cities around the world on lockdown, air travel being restricted and millions of people are working from home, resulting in less oil usage.
The fall in crude oil prices has caused delays in the implementation of Malaysian B20 biodiesel program in the transport sector. The B20 biodiesel mandate, which involves blending 20% of palm oil component specifically the palm methyl esters (PME) with 80% petroleum diesel, is not economically viable during periods of low crude oil prices. CGS-CIMB Securities Sdn Bhd head of research Ivy Ng said the potential loss in CPO demand is expected to be more visible in 2021 should the government decide to halt the B20 Biodiesel Program (The Malaysian Reserve, 23 April 2020). The potential loss in CPO demand will be felt in 2021 because the incremental local palm oil demand from the B20 rollout is expected to be more impactful at 292,000 tonnes in 2021 and 224,000 tonnes in 2022. Meanwhile, the rollout of B20 in 2020 will add only 64,000 tonnes of biodiesel usage because it is launched in phases at selected states.
Malaysian government is currently spending RM35 million for the B20 program, conducting studies and upgrading biodiesel blending terminals with the capacity to handle up to B30 blended diesel (The Malaysian Reserve, 23 April 2020). If the B20 program were to be halted, the allocated fund should be utilized in the areas that can provide long term benefit to the palm oil industry. One of the areas that can be invested in is oil palm replanting in order to increase the yield. To replant ageing oil palm trees and estates, payment is needed for labour, chemical usage, high yielding seedlings and machinery rental. Secondly, the extra fund can also be used to help affected small business owners within the palm oil industry. Industry members from manufacturers to traders should receive assistance to get them back on track after incurring losses, especially under the current scenario where global financial crises is expected to occur. Fitch Ratings expects world economic activity to decline by 1.9% this year and forecast there will be a deep global recession in 2020 (Market Watch). Research and development (R&D) is another area that can use the extra fund, especially in R&D related to science and technology. Malaysian palm oil industry should utilize new technology in order to improve yields.
Prepared by Nur Adibah
- New York Times, 21 April 2020. What the Negative Price of Oil Is Telling Us. https://www.nytimes.com/2020/04/21/upshot/negative-oil-price.html
- The Malaysian Reserve, 23 April 2020. MPOB: Govt defers B20 fuel programme rollout. https://themalaysianreserve.com/2020/04/23/mpob-govt-defers-b20-fuel-programme-rollout
- Market Watch. https://www.marketwatch.com/story/fitch-sees-deep-global-
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