If anyone thought the expiration of the May contract on Nymex for US West Texas Intermediate crude would see an easing in the chaotic trading seen on Monday, think again – the rollover into June merely saw the problem, ‘rolled over’ into a new month.
Likewise, Brent crude futures for June continued to lose ground as well because the problems in the oil market of too much supply, too little demand (and a looming storage crunch, first in the US, then elsewhere) is a global concern.
The new front month for WTI – the so-called most active month – is now June and it fell to its lowest finish in 21 years, a day after the May contract made history by settling in negative territory for the first time ever.
West Texas Intermediate crude for June delivery lost $US8.86, or 43.4%, to settle at $US11.57 a barrel in New York, after touching a low at $US6.50. Based on the most-active contracts, prices settled around their lowest since February 1999.
Meanwhile, the WTI crude May contract, which expired at the end of trading Tuesday, settled at $US10.01 a barrel, climbing $47.64, or 126.6%, on Tuesday—the largest one-day net gain on record, according to Marketwatch.com. That followed the mind-numbing, hard to grasp fall of 306% on Monday to negative $37.63 a barrel.
Meanwhile June Brent crude fell by $6.24, or 24.4%, to end at $US19.33 a barrel in Europe, its lowest finish since February 2002. That was the largest one-day percentage fall since January 1991.
In the US the problem is rapidly filling storage for too much crude and not enough demand.
The weak demand and surplus of supply has encouraged producers (especially in the US) to store oil in the hopes that prices will recover but expectations for higher prices in the future have meant further declines.
WTI contracts for later delivery, for example, have traded at much higher prices than the front-month May contracts. The steeper upward slope for prices in later months in crude a contango situation (which is normal for futures markets in most times), underlines the lack of storage of crude in recent weeks as the coronavirus wreaks havoc on global demand for oil.
The silly price-cutting, production expanding war between Russia and Saudi Arabia – with both aiming at the US fracking sector – has backfired because it has added to the market instability right at the time that COVID-19 has battered demand – the International Energy Agency reckons demand for oil will be down 29 million barrels this month.
Russia and the Saudis depend more on their oil sectors for export income and growth than does the US. While the fracking sector has been hurt, the damage to Russia and the Saudis has also been significant. Their most important export and asset is now worth considerably less.
That has pushed prices lower, buyers don’t want the more expensive crude they have bought, they try to get rid of it by cutting prices (because the storage will be an extra expense on to of the loss now showing on their purchases) and there’s a dearth of buyers, so it becomes a tailing chasing exercise that eventually saw Monday’s absurd negative price for the most traded commodity in the world in the most liquid market in the world outside US Treasuries (and remember that market froze in late March and had to be prised open by the Fed starting several special support funds to buy bonds of all types).
There is no Fed for the oil markets, so the dislocation of the sort we saw on Monday has to be sorted out by the market itself. In the case of oil at the moment that will take a while.
