Page 4 - FSUOGM Week 16

FSUOGM COMMENTARY FSUOGM
Examining the WTI collapse
The unprecedented crash in WTI prices into negative territory has been attributed primarily to the mechanics of futures contracts, but nonetheless illustrates an oversupply crisis as storage fills up
US
WHAT:
WTI prices fell into negative territory, settling at -$37.63 per barrel on April 20.
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.
US oil prices have recovered slightly from an unprecedented collapse into negative territory on April 20, but West Texas Intermediate (WTI) continues to trade at lows not seen since 1986 amid warnings that the crisis is set to worsen. In the April 20 crash, WTI crude futures for May delivery plummeted 305% to settle at -$37.63 compared with $18.27 on April 17 – the previ- ous day of trading, as April 20 fell on a Monday.
The rapid collapse has been primarily attrib- uted to the mechanics of futures contracts as the May contract came up for expiry on April 21. Despite some recovery, the new front month contract for June is also taking a hit now, and other benchmarks including Brent are also feel- ing the impact. With none of the issues that pre- cipitated the crash likely to be resolved anytime soon, the April 20 collapse is now being held up as a sign of much worse to come as remaining available oil storage capacity fills up.
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 Stanley. Combined with planned maintenance, this is estimated to have effectively cut US crude demand by around 4.5mn barrels per day (bpd) compared with nor- mal levels.
This has led to a sharp rise in both crude and refined products going into storage. Morgan Stanley estimates that US gasoline storage utili- sation 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.
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w w w . N E W S B A S E . c o m Week 16 23•April•2020