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Oil prices poised to be under pressure for the foreseeable after unprecedented week, which saw WTI slump to minus US$40 a barrel

In Friday trading, Brent crude was priced above US$20 with WTI holding above US$15 a barrel

Brent Crude Oil -
The May futures WTI oil contract expired on Tuesday, leaving many traders with too much oil on their hands

As the oil price headed south early in the week, analysts and traders were nervous, wondering just how low it might go.

Few people expected it to plunge into negative territory, despite the closing of the May futures contract.

But a minus US$40 price tag for WTI at one point on Monday night; now this was unprecedented and record-breaking territory.

Recovery

The price recovered during the week, but left many producers and investors scratching their heads and wondering what to do. In Friday trading, Brent crude was priced above US$20 with WTI holding above US$15 a barrel.

The May futures WTI oil contract expired on Tuesday, leaving many traders with too much oil on their hands.

Each monthly expiration can introduce occasional volatility into the market but with an over-supply scenario coupled by the reality of negative demand, traders were stuck.

If they could not get rid of the contracts held, they would be forced to take delivery of the oil and then pay for storage. Many analysts say this crisis is in the “paper market” as oil traders will never actually take delivery of the oil.

This was not an ideal scenario given that land-based storage in Cushing, Oklahoma was almost full and not open to new stocks.

The worst fallout was felt in the US market with Brent crude being dragged to new 20-year lows but managing to recover quicker.

Negative prices

The president of Prestige Economics, Jason Schenker says in a note to clients: "The reason prices went negative is because WTI is a physically settled contract for crude oil at Cushing".

American production storage centres around Cushing, Oklahoma which has become a bottle neck in recent weeks with lack of adequate storage facilities.

Schenker clarifies the difference between delivery of both benchmarks.

"WTI crude oil futures are physically settled, but Brent crude oil futures can be financially settled and these contracts do not require buying physical crude oil in the North Sea.”

Making it even more visual, he adds, “this means that you don’t have to sport a kilt and show up in Scotland to come get your crude oil; its financially settled.”

So, the US will continue to face this problem and with prices so low, many American major producers have decided to cut production but its feared that many of the smaller players might not survive this additional oil glut.

No-one is speculating what will happen when the June futures contract closes in a few weeks, but Schenker warns that the uniqueness of the situation “is likely to have negative implications for oil and gas companies and other financial markets".

The proposed OPEC plus agreement on cuts of 9.7 million barrels a day was to begin in May, but Kuwait announced it was taking action this week.

The country’s news agency KUNA quoted the oil minister, Khaled al-Fadhel saying this was a “sovereign decision,” as the government “felt responsible to respond to market conditions” in terms of the impact on global oil demand from the coronavirus.

Big supply withdrawal

The market will be watching the impact of the big supply withdrawal from the wider OPEC and friends group next weekend.

The fallout from the coronavirus will be long and painful. Capital Economics said this disruption “is set to cause the steepest fall in global GDP since the Second World War,” saying they expect a 5.5% contraction in the world economy this year.

The International Monetary Fund says it expects a recessionary contraction of 3% this year and investment bank Julius Baer sees the falloff in growth to be around minus 2.3".

Whatever figures we see emerge, such predicted slow growth in countries around the world will see the demand for crude oil remaining low.

Prices have been on the decline for the past eight weeks. It will take many months for transportation demand to return to any sense of normal and with overall consumer demand predicted to decline, oil demand that’s already down 30%, will continue to suffer.

This start to the second quarter will be remembered as another record-breaking week in the oil sector.

Since the beginning of the year, the oil price has fallen about 75%.

Nothing like this week’s move has happened in the history of oil trading with about a US$50 swing in one day. The market is not used to such horrific losses and it will certainly be hoping that this will be a one-off.

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