Page 5 - FSUOGM Week 16

FSUOGM COMMENTARY FSUOGM
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 levels 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.
Brent was still trading above $25 per barrel on April 20 despite losing 8.9%. As a Brent is a seaborne crude, it is less immediately vulnerable to storage issues and can be easily sent to areas of higher demand. Nonetheless, the international benchmark fell to levels not seen in over 20 years, dipping below $16 per barrel in Asian trade on April 22 before stabilising above $21 per barrel later in the day.
The WTI June contract had clawed its way
back to above $14 per barrel on April 22 after US trading opened, but its value had almost halved the previous day, and there are mounting con- cerns about what the coming weeks will bring.
“The realisation of negative prices has clearly spooked the market, with worries that we could see the same for the WTI June contract and pos- sibly even in the Brent market,” ING’s head of commodities strategy, Warren Patterson, was quoted by the Financial Times as saying.
What next?
The concern now is that time is running out until available storage capacity fills up. Morgan Stan- ley estimates that storage in Cushing is currently on a trajectory to fill in around three weeks, with all available US storage capacity filling within about six weeks.
Consultancy Rystad Energy, for its part, antic- ipates that onshore storage could run out either in the first week of May, or – if all remaining stor- age with 100% utilisation is included – the end of May. The consultancy noted that its models suggest this to be the case even with OPEC+ cuts that will be implemented from May 1.
“Time to throw old perceptions of physical laws to the side and be prepared for more sur- prises in this broken oil market,” commented Rystad’s head of oil markets, Bjornar Tonhau- gen. “Prices can go to unprecedented low levels even for Brent as, unless there are further cuts announced, storage capacity will just not be enough.”
More supply cuts are undoubtedly looming as producers reel from this week’s oil price vola- tility so far. But Morgan Stanley has warned that the US supply cuts announced to date are only a fraction of the roughly 1.0-1.5mn bpd of reduc- tions – equating to 8-12% of US supply – neces- sary in order to avoid “tank tops” in the second quarter.
Similar trends are playing out elsewhere in the world. Production cuts are coming, but not fast enough.™
The Cushing gas storage facility in Oklahoma.
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