“Insane” Market for Oil traders for Decline to Negative Prices

Due to the coronavirus pandemic, the oil market seems to be facing unfamiliar territory for drop-off in demand.

This has been combined together with quickly filling storage, sent prices constantly plunging into negative territory for the first time in history.

With guesswork regarding when stay-at-home orders might be lifted and when crude demand might increase, the traders are warning that oil might continue to trade at tremendously depressed levels.

Problems faced in the oil market

RBN Energy’s Rusty Braziel has told CNBC, “If we have not recovered from Covid in July so that enough driving has come back and storage is full, then the price of crude oil is going to be zero.”

He has also called Monday’s trading activity “insane,” and further said that in his more than 40 years of trading, he had “never seen anything like this.”

West Texas Intermediate crude for May delivery has fallen on Monday by more than 100% in order to settle at negative $37.63 for each barrel.

This indicates sellers would effectively pay to get the oil taken off their hands.

The contract will expire on Tuesday that fuel wild swing to the downside as the traders have already scrambled to get out of their positions.

The long-term contracts have been settledfor more than $20 each barrel on Monday.

However, losses have increased due to overnight trading by suggesting the traders are highly concerned about a lack of storage will continue to rise in the coming months.

The agreement made for June delivery has fallen to 18.7% for conducting trade at $16.61 each barrel on Tuesday.

The July contract was nearly 10% lower at $23.66 for each barrel.

High pressure till demand for oil increases


Bernadette Johnson, Enverus’ vice president of strategic analytics has noted that the June contract will probably face pressure till the demand comes back.

She also thinks that it will “start coming down over the next month.”

This viewpoint has been reflected with challenges in the options market that helps in the right Oil Trading Signals

Scott Nations, president and chief investment officer at NationsShares has noted that June 0.50 puts will presently be trading for at least 50 cents.

This indicates the traders can make a profit only when the June WTI contract expires in the negative territory due to the option premium. 

Meanwhile, Johnson has said an insufficiency of storage will force oil companies to stop the production. 

She has told CNBC in an email, “What we’re into now is shut-in economics.”

“Product demand is off and when product demand is off, you don’t buy crude.

If you don’t buy crude, you can’t produce the crude if there’s not a place to store it, and so that’s the problem.”

In the near term, she sees WTI hovering around the $10-$12 level.

According to the analysts at Deutsche Bank, prices might be in negative territory before rebounding by pointing towards inadequate storage capacity and pipeline.

Analyst Michael Hsueh has also said, “Continued pressure on infrastructure may result in negative pricing at some point again before the end of May, on the current trajectory.”

Decline in oil prices leading to a swift move

The decline in prices has been a swift and steep move since this pandemic has caused exceptional demand loss.

People are not flying or driving which means there is no use for barrels of oil and inventories are also building.

The U.S. Energy Information Administration on Wednesday has said, stockpiles will be rising by almost 19.2 million barrels I the week that ends April 10.

Due to adverse backdrop, Goldman Sachs believes that the volatility will stay “exceptionally high” in the coming weeks, however, shut-ins will ultimately be the reason for stabilization in price.

Goldman analysts which is led by Damien Courvalin has said in a note to the clients, “This inflection will play out in a matter of weeks, not months, with the market likely forced to balance before June.”

Historic yield cut in the oil producing allies

About a week before, OPEC and its oil-producing allies have agreed upon a historic yield cut that would require 9.7 million barrels each day off the market.

However, oil closed in negative territory on the next day has denoted that the cuts that will start from May 1, won’t be sufficient to fight against the fall in demand. 

The International Energy Agency has warned in the monthly oil report that the demand in April might be 29 million BPD lower than one year ago by hitting the level lastly seen in 1995.

The analysts at Citi have said that the inventories and supply need to tighten in the second half of the year and the short period might find more fluctuations in the price.

According to the analysts led by Eric Lee, “The next 4-6 weeks are seeing severe storage distress, likely to drive wild price realizations and unusual disconnects, including super contango and negative prices.”

Contango is when longer-dated agreements trade at a premium to the present contracts.

Finally, as there is uncertainty about when global economies will reopen reigns supreme, Braziel may only point out to any optimism in the higher-priced longer-term contracts to one belief: “Hope springs eternal.”

Leave a comment