Page 6 - LatAmOil Week 16 2020

LatAmOil COMMENTARY LatAmOil
WHY:
The crash has been primarily attributed to the expiration of a futures contract and a resulting squeeze on holders
of long positions, who scrambled to exit them.
WHAT NEXT:
None of the underlying problems will have been resolved by the time the next futures contract expires.
Contract killer
The market for physical barrels is not yet faring as badly as the WTI drop into negative territory would suggest at first glance. It does, however, illustrate how a combination of forces is putting immense pressure on oil prices, and will con- tinue to do so.
The crash took place against the backdrop of a collapse in oil demand as the response to the coronavirus (COVID-19) pandemic led to a drop-off in travel and industrial activity. Reflecting a global trend, a number of US states imposed lockdowns of varying severity last month, sending fuel demand into freefall.
In response, and again in line with global trends, US refiners cut activity by 25-30%, according to investment bank Morgan Stan- ley. Combined with planned maintenance, this is estimated to have effectively cut US crude demand by around 4.5mn barrels per day (bpd) compared with normal levels.
This has led to a sharp rise in both crude and refined products going into storage. Morgan Stanley estimates that US gasoline storage uti- lisation has risen from 66% to 73% over the past four weeks – the highest level for any season over the past five years according to the bank. Crude storage utilisation at Cushing, the US hub where WTI is priced, has also surged, with stocks ris- ing by 10mn bpd between March 27 and April 10, according to the US Energy Information Administration (EIA).
These factors combined with the upcoming expiry of the May crude futures contract on April 21.
Indeed, warnings had been sounded about looming storage capacity shortages since mid- March, when many lockdowns began, but the
expiry of the May contract dramatically exacer- bated the impact on prices.
As the deadline approached, traders that still had contracts for May delivery were increasingly struggling to find buyers as options for where to send the physical barrels dried up.
What buyers remained insisted on being paid to take out the positions, sending the crude price crashing to unprecedented negative lev- els as the spot price of WTI converged with the May futures price, which typically happens as contracts expire.
“Today’s previously unimaginable record low reflects a massive physical supply surplus, tomorrow’s expiration of the May 2020 WTI contract, and the high cost of scarce crude oil storage capacity,” consultancy IHS Markit com- mented on April 20.
The consultancy noted that the June contract, which was due to take over as the front month contract, settled at $20.43 per barrel on the same day, suggesting that oil was not expected to be worthless by the summer.
However, subsequent price movements do not demonstrate much confidence, and indeed IHS also warned that the negative pricing was an “ominous” sign.
“The fact that prices went this low at all reflects brutal market forces that will not disap- pear with the expiration of a single monthly con- tract,” commented IHS Markit’s vice-president and head of oil markets, Jim Burkhard.
Spilling over
While WTI is no longer negative, the value of the June contract has tumbled since April 20, and other benchmarks such as Brent are also seeing downward pressure.
“ place against
The crash took
the backdrop of a collapse in oil demand

P6
w w w . N E W S B A S E . c o m Week 16 23•April•2020