It can get lower. You have to wait for the technicals to line up…
You think it will still go lower?
Unsurprisingly, oil markets came under pressure again yesterday (4/21) following negative prices in the WTI May contract.
The WTI June contract settled more than 43% lower on the day, and below US$12/bbl. ICE Brent also came under pressure, down almost 25% and settling below US$20/bbl.
The realization of negative prices has clearly spooked the market, with worries that we could see the same for the WTI June contract, and possibly even in the Brent market.
Although for now, we think this is more unlikely, given that Brent does not suffer from the same capacity constraints as the land-locked WTI market, being a seaborne market.
In addition, Brent is cash settled, and so there is not the same pressure on longs to close out their position at expiry, unlike the physically deliverable WTI.
OPEC+ ministers also held a conference call yesterday, given the pressure we are seeing on the market at the moment. The group have not decided on any new policy moves, although the pressure to so something will likely build in the coming days and weeks.
The issue for OPEC+ is that there is a limit to how much they can do. They are already set to implement record cuts, and it will be a struggle for them to stomach further reductions. Instead, the group should have agreed that cuts start as soon as possible after the deal was struck earlier this month. It is a bit late for that now.
The Texas Railroad Commission also met yesterday, but there was no decision made on mandated production cuts in the state. This means that the market will likely have to wait until 5 May for any further news from Texas, as this is when the commission meets next.
Finally, the API reported yesterday that US crude oil inventories increased by 13.2MMbbls over the last week, and if confirmed by the EIA later today, would be the fourth consecutive week where the inventory build has exceeded 10MMbbls.
Meanwhile, the API also reported that Cushing crude oil inventories increased by 4.91MMbbls, while we also saw sizeable builds in both gasoline and distillate fuel oil stocks.
This is a market and it does not reflect the world price of oil.
The contractual terms of the WTI Crude Oil contracts traded on the CME NYMEX market are based upon the domestic pipeline delivered crude oil contract. This is not the crude in tankers.
Because of the sudden drop in domestic demand thanks to the lockdown, there is no demand for gasoline and even jet fuel has declined in demand.
The result is the filling of the majority of storage facilities inside the United States for the supply was coming in by pipeline rather than trucks or tankers.
This is why the domestic crude oil market collapsed ahead of expiration.
This was a long-squeeze so to speak that people were forced to take a loss for the lack of storage.
You can say that the price of storage rose dramatically.
We may see a similar problem in the domestic natural gas market as the rollover is starting to show gaps.
This situation does reflect the scope of the international market in Asia or Europe. BRENT Crude oil is the international benchmark reference index price for the majority of global oil markets. BRENT Crude prices are holding above US$25 dollars per barrel for immediate physical delivery.
The GLUT is reflected in the United States and this is impacting domestic production that will lead to the drop which in turn will swing back and eventually materialize in higher prices and production then declines and jobs are lost.
Nevertheless, this is going to keep the pressure on the Middle East and OPEC. With such a glut in the USA, the same is likely in Europe.
A perfect opportunity to implement a Buy when it’s cheap or Sell when it’s high Strategy…
Buy Stop (Pending) Order Pyramid in place for the spike back up to $20 a Barrel…
Crazy stuff. Can’t believe they let them hold these positions open so close to expiration. Usually, for retail accounts, positions get closed out automatically two days prior to expiration.
Several Interactive Brokers LLC (“IBLLC”) customers held long positions in these CME and ICE Europe contracts, and as a result they incurred losses in excess of the equity in their accounts. IBLLC has fulfilled the firm’s required variation margin settlements with the respective clearinghouses on behalf of its customers. As a result, the Company has recognized an aggregate provisionary loss of approximately $88 million.
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We will never see this before and we won’t see anymore. Coronavirus is showing its all power of economy destruction. Oil is just a aftermath of this scenery. But it won’t be with this price as far now. There is many powerful people behind scenes that they use black gold to rule the world
As EIA states:
"Crude oil storage facilities at Cushing have 76 million barrels of working storage capacity, of which 60 million barrels (76% after accounting for pipeline fill and stocks in transit) were filled as of April 17 (Figure 2).
Although Cushing has physically unfilled storage available, some of this physically unfilled storage is likely to have already been leased or otherwise committed, limiting the uncommitted storage available for contract holders without pre-existing arrangements. In this case, these contract holders would likely have to pay much higher rates to storage operators that have uncommitted space available."
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WTI June contracts fell as low as $6.50 a barrel before it bounced back to $15. However, it’s hard to see how the WTI can hold up against the immense pressure caused by the lack of storage.
Even the global benchmark for crude oil—Brent Crude Oil (BZ)—tanked. The turmoil in global oil markets dragged Brent futures under $16 a barrel, leaving the front month trading at its weakest since 1999!
Luckily, the Brent futures contract is cash settled, not physically. So in theory, Brent should not see negative prices. But now we are seeing similar concerns about floating storage (oil tankers) starting to fill up as oil demand has fallen off a cliff. Globally, there are about 160 million barrels of oil already sitting in oil tankers, awaiting higher prices.
So if global storage is running out—and that is what the Brent trade is starting to suggest—then there will be no bid and prices could hit zero. An indicator of trouble in Brent, which is ultimately a seaborne crude, will come from shipping freight rates. If these costs go up and begin to soar, it probably indicates floating storage is filling up globally.
What was sad to see was the retail investors getting burned by this. However, they have only themselves to blame—the harsh reality in the oil market is that, thanks to the so-called coronacrisis, there are 30 million too many barrels of oil out there every day as demand dries up. The Saudi-Russia deal brokered by President Trump will only remove about 10 million barrels a day of production.
Over the last few weeks, retail traders have been pouring unusually large amounts of money into the popular oil exchange-traded funds (ETFs), such as the United States Oil Fund (USO) , with $4 billion in assets.
These ETFs reflect the price of oil largely via futures ownership at the front of the curve and a steady roll into the second month (and by now partly also the third as risk mitigation) as expiry approaches.
As the funds diligently executed their normal functions, they set themselves and investors up for disaster when it became clear last week that they owned a quarter (or at the end even more) of the outstanding May contracts that no one wanted to buy! Not only that, but the United States Oil Fund also owns about a quarter of the June contracts, too.
The United States Oil Fund is ditching its June holdings as it tries to shore up its balance sheet, and this will have an impact on the front month trading. Its actions will also be sharpening the super contango . It becomes a vicious circle as long as no one wants to take delivery . For those not familiar with the term, contango is a situation where the futures price of a commodity is higher than the spot price.
USO had been 100% collateralized, with nearly $5 billion in cash and ultra-safe investments backing its futures positions, according to its website. But May delivery US oil futures fell more than 300% on Monday. “The concept of ‘fully collateralized’ just went out the window,” Carl Gilmore, president of Integritas Financial Consulting (a derivatives markets consultancy), told the Financial Times .
The number of US oil rigs is approaching the 2016 lows.
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Speculative accounts are boosting their bets on US crude oil.
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