A negative oil price will not be the new normal, experts say

The US benchmark has plummeted because traders fear storage is running out amid historical demand lows


US benchmark WTI crude tanked to negative US$37.63 per barrel on Monday, a reading that has never been seen before.

Despite the oil market being very much battered by the coronavirus pandemic, experts say this will not be the new normal.

READ: Oil prices continue to slide as IEA sees global demand falling by 9.3mln barrels a day this year versus 2019

“[Monday’s] price action is best understood as a quirk or peculiarity of futures trading - one that has been made much more extreme by the current situation,” said James Trafford, analyst & portfolio manager at Fidelity International.

Oil futures are contracts to eventually deliver the commodity to a specific location.

The WTI prices indicated delivery at the major hub of Cushing, Oklahoma, in May, for a contract scheduled to expire on Tuesday.

Conversely, Tuesday’s WTI spot prices for June were around US$21 per barrel.

Sellers have been trying to get ahead of the expiry date for the May contract, pushing the US market into ‘Super Contango’.

That is when traders store oil to sell at a later date because they think the price will eventually spike.

“If a market is in contango, no one wants what you are selling today, but they might want some in the future,” explains Jeffrey Halley, analyst at OANDA.

“Physical oil traders have no space available,” said Ole Hansen, head of commodity strategy at Saxo Bank, “If they had space, they could buy May crude oil, take delivery, store it and then sell it back into the market in June, earning a one-month return of close to 60%.”

“Speculators having bought the June contract now risk that it could get pulled lower over the coming weeks towards where the May contract is currently trading,” Hansen added.

“Only a major change in the fundamental outlook through lower production, due to producers being forced out of business, leaving wells idle or improved demand for fuel can prevent this.”

As the coronavirus pandemic has forced governments worldwide into imposing travel restrictions and business closures, demand has plummeted to historic lows.

The International Energy Agency (IEA) said last week demand in April is estimated to be 29mln barrels per day lower than a year ago, a level last seen in 1995.

With this oil surplus having to be placed somewhere, analysts fear US storage could already be at 70-80% capacity.

The delivery point in Cushing has seen stockpiles rise by 50% since the start of March.

“The lack of demand and landlocked nature of production in the US and Canada has already started to provide negative prices across a number of crude products in North America,” said Joshua Mahony, analyst at IG.

“With a huge surplus in crude products filling inventories on land, there is a clear benefit to those producers that are able to put their oil out to sea.”

This explains why Brent crude, a combination of oil coming from 15 different oil fields in the North Sea, has been hovering around the US$27 mark.

Oil producers located near a harbour can ship their products more easily.

However, although US producers are now taking the hardest hit, global oil prices are expected to remain weak.

“The supply cuts that were recently agreed by the OPEC+ group of oil-producing economies are not likely to be sufficient to balance the market soon, in my view,” concluded Trafford.

“Over the medium term, I see oil price gains capped, as accumulated storage must be unwound, spare capacity must come back online, and the oil-intensity of the economy probably settles below pre-crisis levels.” 

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