Oil went to zero on Monday. And then it fell some more.
Described (somewhat aptly) as a “technical oddity”, the combination of imminent expiry for the May contract and the worst fundamental backdrop in the history of the global oil market sent WTI tumbling deeply into negative territory.
The complete wipeout in the May contract shattered every record low for oil prices dating back at least 74 years. The figure below shows the moment it became apparent that zero was a foregone conclusion:
It got considerably weirder from there.
“Incredible”, Pierre Andurand marveled. “[This] is what happens when logistical constraints are tested. Worried about the exchange and the people who were on the wrong side”.
“So if crude goes from -$40 to -$20, has it doubled or halved?”, Bloomberg’s Cameron Crise wondered.
I went over this at some length first thing Monday morning. Near-term demand for crude has collapsed by roughly a third. Specifically, demand destruction tied to the containment measures around COVID-19 is estimated at between 20 million and 30 million barrels per day.
That means the OPEC+ production cuts (9.7 million barrels per day) are woefully inadequate, and in any case, aren’t implemented.
With demand having all but flatlined and the market reeling from the short-lived price war between Riyadh and Moscow, storage capacity is exhausted. The entire infrastructure is flooded. Nobody can take delivery. We’ve reached the limit.
WTI ultimately traded negative for the first time, and deeply so, putting yet another feather in COVID-19’s cap when it comes to throwing off incredible market dislocations.
Again, you should note that this is in part due to the proximity of expiry for the May contract, but the bottom line is that the world’s most financialized commodity has become (less than) worthless due (somewhat ironically in that context) to physical constraints.
“Refiners are rejecting barrels at a historic pace and with US storage levels sprinting to the brim, market forces will inflict further pain until either we hit rock bottom, or COVID clears, whichever comes first, but it looks like the former”, RBC’s Michael Tran said Monday.
It sure does, Michael.
WTI May futures settled at -$37.63, down 306%.
The St. Louis Fed has monthly continuation data going back nearly to World War II. Simply plotting that settlement on the chart creates a poignant visual.