Oil sellers add new 'zero price' clause in contracts in Asia: Sources

Companies selling crude and condensate in Asia have added a new clause in contracts that prevents prices of their oil from falling below $0, eight sources with knowledge of the matter told Reuters on Thursday.

Oil markets were stunned on April 20 when U.S. crude futures collapsed into negative territory for the first time in history, as a coronavirus-induced supply glut and lack of storage saw desperate traders paying to get rid of oil.

The new clause comes as sellers in Asia seek to protect their interests, as prices of some physical crude grades sold in the region have fallen to close to $10 a barrel due to heavy discounts, the sources said.

The sources are involved in a range of crude grades from Asia's regional low-sulphur crude, to ultra-light condensate, to Russian and Middle East high-sulphur crude.

These grades in Asia are priced off dated Brent <BFO->, which recently fell below $20 a barrel, and Dubai quotes, while sellers are offering cargoes at deep discounts amid oversupply and weak demand as a result of the coronavirus pandemic, the sources said.

The zero dollar clause was first used in north America as major oil companies and those involved in U.S. shale earlier this month introduced the clause to avoid having to pay buyers to take oil away.

Most Asian buyers have shown high acceptance of the newly added clause that protect sellers' interests, they added.

"If not, no cargo," said a first source at a trading house.

While every company's legal languages differ, the core of the clause is that "dollar per barrel of oil will not be lower than zero under any circumstance", said a second source, who works with an oil producer. The cargoes will still be delivered with the minimum price being $0.

"It's something all sellers try to get into their sales contract. Crude, condensate or products. No one wants to pay the buyer to lift their barrels," said a third source, with an oil major.

For now, the clause looks most relevant for sales of condensate in Asia, as the ultra light oil is heavily discounted and performing worse than other crude in the physical market, four of the sources said.

"No one ever expected prices to go negative!", said a fourth source, who works with another oil producer, adding the clause had recently been added to its contracts.

Sellers of Middle East crude, except the national oil companies, have also requested the clause in their cargo sales, said two of the sources, who trade Middle East barrels.

A seventh source at an Asian refinery confirmed such a clause has been added to its contracts, with the minimum price set at $0 or $1 a barrel.

All of the sources declined to be named due to the sensitivity of the matter.