- WTI prices have rallied in a broader risk-on environment.
- There is still plenty of downside for WTI as Cushing storage fills up the brim.
- COVID-19 demand shock is here to stay, unless some drastic measures are taken by OPEC+.
The price of a barrel of oil is higher on Wednesday’s US session’s trade, rallying from a low of $10.20 to a high of $16.21, +10%.41 at $14.35 at the time of writing. The risk mood has improved according to the charts with green seen in US benchmarks as well as commodity prices in general. However, broader volatility in markets is making for whipsaw price action and the path of least resistance is blatantly down, fundamentally.
COVID-19’s life span is obviously something that cannot be determined at this stage, but what is absolutely clear, is that storage facilities are drying up and June’s expiry will be one to watch. The June contract plummeted to negative $36 and change earlier this week. Those looking for delivery at Cushing’s found that they were almost left with nowhere to take delivery (Cushing was already at around 80% capacity) and as a result of an oversupplied market. If production is not cut very soon, or even extreme measures such as shutting wells, it is inevitable that the oil market, upstream and downstream, will remain in real trouble.
This is just getting started
On Tuesday energy ministers from the OPEC+ major oil-producing countries talked at an unscheduled conference call to discuss the collapse but did not agree on any new measures to cut supplies. However, we have seen a rebound nonetheless as volatility plays out.
There is some acknowledgement of additional storage facility capabilities, including at sea. Also, the US Department of Energy is currently in the process of leasing some of the 77 million barrels of available oil space in the Strategic Petroleum Reserve. President Donald Trump is considering the prospect of preventing incoming Saudi Arabian crude oil shipments in an attempt to ease pressure on US shale producers. Trump also reaffirmed his intention to top up the country’s emergency fuel storage of petroleum.
Today, we have seen shares Halliburton and Marathon Oil among the best performing stocks in the S&P 500. However, the further the imbalance in the market goes on, and on it will, bankruptcies of perhaps the smaller organisations will be dominating the headlines instead. Analysts at TD Securities explained that crude oil is not out the woods just yet, after the near-impossible happened:
“We remain concerned that the left tail remains wide in crude oil — the steep roll costs associated with an extreme contango could catalyze a reversal in the large ETF position built over the past few weeks. The steep contango, which of course is itself related to the massive actual and expected inventory builds, could even steepen further, which would ultimately translate into a large loss for those investors which are long. Facing sufficiently large losses incurred by this process, investors could reach a pain point that would catalyze large liquidations — further adding pressure on crude prices.”
Combine this sentiment with the very prospect of a broken US physical market at Cushing with an estimated record of 160 million barrels of oil now held in floating storage on ships, and the continuous threat of contagion of COVID-19, there is no bottom to how low prices could go. This all may just be getting started as this time next month could be even more of an issue as Cushing potentially maxes out by the middle of May.
WTI levels
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