WTI Crude Contracts Turn Negative
April 21st, 2020
The headlines and stories on TV were all about the collapse in the energy market and reports that this was the first time WTI crude oil future had traded negative. There had been talk of single digit crude oil prices, but no one saw negative $40 dollars per barrel coming. If defies logic that you would have to pay someone $40 dollar to take a barrel of your crude oil away. This is a sure sign that the coronavirus and the lock downs it has caused have created unprecedented times.
To make a long story short and hopefully simple yesterday’s trading action into negative territory was driven primarily from speculative money (several reports indicate it was mainly the United States Oil ETF,USO), in the market that needed to roll positions (sell May length in WTI, buy June WTI), and because there is not physical storage capacity left in Cushing there was no one there to buy the May contract. So, in this case the market had to go all the way down to negative $40 at one point to find someone willing to buy that contract. A sign that crude oil storage is getting very full as it took a very big and historic move for someone to buy that contract and most likely put those barrels into storage and wait for higher prices. Today is the last day for the May WTI crude oil contract and the June contract is selling off today giving the market more confirmation that storage is filling up fast. The negative impact is now spilling over into the products as they are selling off in early trading.
Crude stockpiles continue to pile up in Cushing, Oklahoma and are around 61 million barrels currently. The hub has a capacity of 76 million barrels, and it is expected to fill soon. The supply glut is not limited to onshore, as floating storage has exceeded 160 million barrels, breaking a previous record of 100 million during 2009.
Yesterday’s unprecedented collapse far into negative territory of the West Texas Intermediate contract for May delivery is starting to feed into June prices. This morning the far more actively traded future briefly dipped below $12 a barrel, while a similar Brent contract was under $20 a barrel. The warning from the IEA last week that the world is close to running out of places to hold oil is ringing true, with the biggest independent storage company saying space has all but run out.
A Wall Street Journal reporter tweeted that Saudi Arabia is considering applying oil cuts as soon as possible rather than in May.
This massive decline in crude prices will force many to take more aggressive actions and wells will continue to shut down, refineries will scale back substantially, some energy businesses will feel a real strain and others will go out of business. The realities of the impact of the coronavirus and the massive lockdowns that shut off energy demand and the price war between Saudi Arabia and Russia that flooded the market with crude oil are coming to fulfillment.