The oil market suffered an epic rout last day, with the may contract for us WTI crude plunging 306 per cent to close negative for the first time in its history, and the prospect of another bout of violence could come with the arrival of the April 21 “super Tuesday” move. For the session, investors will also be watching as Texas oil regulators discuss crude production limits.
Epic crash! The may contract for WTI crude plunged 306 per cent into negative territory
Us WTI crude for may jumped more than 100% to return above the zero dollar mark in early trading on Tuesday, while WTI crude for June rose nearly 9% to return above $22.
The oil market witnessed an epic rout last day, with the may us WTI crude contract slipping into negative territory for the first time in its history, closing at $37.63 a barrel, down 306 per cent, after hitting an all-time low of $40.32 a barrel.
The June WTI contract, which expired May 19, was down about 15.7 percent at $21.10 a barrel. The July contract was down about 5% at $28 a barrel. Meanwhile, brent crude, the international benchmark for the June contract, fell 8.8 per cent to $25.60 a barrel. But it is not nearly as weak as U.S. crude, as there is more room for global storage.
The extreme price action also highlights the extent of the glut in the us oil market. In New York, WTI crude fell as low as minus $40.32 a barrel in May, well below its lowest level since 1946, when monthly data began, after world war ii, according to the st. Louis federal reserve bank.
For the first time in history, U.S. crude prices have slipped into negative territory, meaning sellers of crude futures must pay buyers to avoid taking in thousands of barrels themselves.
“What the energy market is telling you is that demand is not going to come back soon and the market is going to be oversupplied,” said Kevin Flanagan, head of fixed income strategy at WisdomTree Asset Management.
If lower oil prices encourage people to buy more fuel, that could boost the economy, he said, “but it takes people to get out.”
U.S. crude futures turned negative for the first time because U.S. energy companies have run out of room to store the vast amount of unused oil slopping around as the COVID 19 outbreak brought the economy to a standstill. No one wants a crude contract to expire if there is no place to store it.
WTI crude may futures will expire on April 21, local time. NYMEX New York crude oil may futures contract to change positions, April 22, Beijing time at 2:30 am, the floor to complete the final trading, electronic final trading at 5:00 am.
Traders holding the WTI crude contract for may fear it will be difficult to find a place to store physical oil amid a growing supply glut.
Also concerned about the lack of demand for physical oil, investors sold out before the may contract expired late Monday. When a futures contract expires, the trader must decide whether to accept physical delivery or to roll over his position into a far-month contract.
Normally, the process is not complicated, but this time few are buying the contracts from investors for delivery, as storage space at Cushing, Oklahoma, where us crude futures are delivered, is rapidly shrinking.
Morgan Stanley analysts said in a research note that the unprecedented fall in WTI crude futures below zero was due to a lack of market participants with the capacity to store oil in Cushing, Oklahoma. Cushing storage space is rapidly running out and is expected to reach its limit by mid-may.
Robert Yawger, head of energy at mizuho securities, said in a report yesterday that “supply is likely to exceed storage capacity in the coming weeks, and crude oil production shows no signs of abating.” If crude stocks continue to grow at the current rate, he said, us stocks would break records in two weeks and reach their maximum capacity in eight to nine weeks.
Goldman sachs warned that the collapse was a “symptom” of an unprecedented oversupply in the oil market. There could be “potential for further trouble” for may WTI crude futures. Next up is “downward pressure” on the WTI crude contract for June.
Trump: fill us strategic stockpile!
US President Donald trump said at a press conference last night (20 April) that he was considering buying 75 million barrels of crude oil for the country’s strategic reserves to “fill up” the country’s stockpiles in the face of record low oil prices. Meanwhile, Mr Trump said he would consider stopping crude imports from Saudi Arabia.
Barron’s revealed that the us strategic petroleum reserve could hold up to 727m barrels of crude oil in terms of inventory space. But the reserve has a ceiling of 713.5 million barrels. On April 17, the U.S. strategic petroleum reserve had 635 million barrels of crude oil. If trump buys another 75 million barrels, it would raise U.S. strategic petroleum reserve stocks to 710 million barrels — close to the limit.
The energy department had opened about 77 million barrels of remaining storage space at the site to U.S. companies before Mr. Trump’s big oil purchase, starting in May with a service that pays companies to store excess oil.
Mr Trump said the fall in oil prices was very short-term and that the negative oil price reflected financial problems, “largely related to short sellers” and “a financial stampede”, not the crude situation. But he acknowledged that global demand had collapsed “because very few people around the world drive”.
He said it was a great time to buy crude and was looking at adding up to 75 million barrels of oil to the strategic petroleum reserve.
He also said he would consider proposals to stop Saudi oil imports. “we already have enough oil,” he said.
This session, in addition to keeping an eye on how oil prices move ahead of delivery day, is also on alert for the Texas oil regulator’s discussion of a crude production limit that could further affect prices.
Stocks around the world were hit by a plunge in us crude oil prices, with Wall Street stocks closing lower, while spot gold briefly breached the $1,700 mark and hovered around the $1690 mark in early trading on Tuesday.
“Gold rallied on bets that the unprecedented global monetary stimulus will only increase,” said Edward Moya, senior market analyst at brokerage OANDA in Toronto. “after the historic collapse in the oil sector, this is a reminder to everyone that global economic activity is far from normal.”
“It is hard to imagine that risk assets will continue to outperform this week, which should provide strong fundamental support for gold,” Moya said. If gold stays at $1,700 by the end of the day, it could eventually test $1,800 an ounce this week.”
In addition, the day also needs to see whether the two parties can reach an agreement on a new round of economic stimulus plan. U.S. lawmakers say house speaker Nancy pelosi is expected to reach a consensus on the aid deal, but no final agreement has been reached.
House Speaker Nancy Pelosi said, “we reached an agreement with the republicans on legislative principles. Hopes to reach an agreement on emergency funding tonight; There is about a $120 billion package for small and micro-businesses.”