So what happens today and tonight with trading in US West Texas Intermediate (WTI) crude oil after the May contract crashed into negative territory for the first time in history on Monday?
West Texas Intermediate WTI), the US marker, lost 306% on Monday to settle at minus $US37.63 a barrel in a day of chaotic trading in oil markets. It was trading at negative $US30.40 a barrel in Asian dealings on Tuesday morning.
Brent crude for June delivery the international benchmark, finished down $US2.51, or 8.94%, at $US25.57 a barrel, after falling 10.8% last week. Brent is more seaborne than WTI, which is often moved via pipelines, is somewhat less constrained by immediate storage worries. But Brent fell 10.8% last week indicating demand is very weak.
This sets up a miserable day for oil stocks on the ASX today. The record plunge helped send Wall Street down by 2% for the Dow and 1.9% for the S&P 500 and the ASX was looking at a drop of more than 40 points at 6 am.
In contrast, the price of June oil fell 16% to settle around $US20.90 a barrel – a better indicator of the price. It becomes the nearby month when the May contract expires tonight. But that holds out the prospect of a global oil market totally locked for the next 12 hours or so by what traders call a case of ’super contango’.
The fall in the June contract price tells us that demand for oil is really weak and the US oversupply problem isn’t going to be resolved anytime soon.
The long-mooted but not carried out promise from the Trump administration to buy oil for America’s strategic reserve will only provide temporary relief.
Futures markets normally trade in a contango position – the current month’s price is lower than the future months, but when there is a concern about short term supplies for example, like now, too much oil, the current or nearby month falls faster than the out months.
If there is a concern about future demand and supply the price curve falls into a position of what is called ‘backwardation’. That’s usually associated with fear of future recessions.
This super contango position has developed rapidly as the expiration of the May contract moved closer – it appeared on Friday when the price of May WTI fell 8% to settle around $US17 a barrel.
The June contract dropped 2% to just over $US25 a barrel. That gap grew as trading started in Asian time, on Monday continued into Europe, then the US and plunged to its settlement just after 4 am Sydney time.
Traders in effect capitulated in the face of limited access to storage capacity across the US, including the country’s main delivery point of Cushing, Oklahoma, and the other major storage area at Midland in Texas. Texas is the country’s biggest oil producer.
Demand for oil and its products has evaporated thanks to the coronavirus pandemic leaving the world awash with oil and not enough storage capacity.
The production cuts deal from OPEC, Russia and others last week clearly not enough to have any sort of impact on prices for the time being, perhaps months.
The plunge to negative prices for the nearby May month meaning producers are paying buyers to take it off their hands. That’s the same as negative interest rates set by central banks in Japan and Europe – its the holders of the assets that are paying the central bank interest, not the usual way of the central bank paying interest to its creditors.
The real worry about Monday’s session wasn’t the historic negative prices for the May contract, but the big fall in the June and other outer months.
That tells us demand for oil has collapsed so much because of the coronavirus pandemic, that facilities for storing crude are nearly full.
Oil is already being stockpiled on barges and tankers out at sea, and in any pipes and small tanks can in their storage facilities. Pipielines are pumping the oil they contain at a slower rate (increasing the amount of oil in them).
Under US crude futures contracts, West Texas Intermediate — the American oil-price benchmark — is delivered to Cushing, Oklahoma, but investors are worried that there will be no place to put it there. The oil goes from there into pipelines across the US to refiners and other end users.
Crude stocks at Cushing are around 55 million barrels, according to Ryan Fitzmaurice, commodity strategist at Rabobank in the US, in a Friday note. The all-time high was 69 million barrels set back in April 2017 – operational capacity is stated as just under 92 million barrels.
US oil stocks rose a record 19 million barrels in a week – the total – 504 million (according to the Energy Information Administration). Data tomorrow night will show another big rise, underlining the problem.
There is however some light at the end of the tunnel. US oil rig numbers are plunging – down 126 in the past two weeks as US fracking companies stop or curtail operations.
More and more companies are cutting production by shutting in wells – ConcoPhillips last week revealed plans to cut its US output by 200,000 barrels a day and north American output has been trimmed by more than 700 million barrels a day in the US and Canada, according to Reuters.
But these benefits won’t impact supply for some months to come.
