Oil Is All To Hell And ‘Negative Prices Are Possible’

Monday might have fairly been described as “quiet” (and especially by recent standards) were it not for more dramatics in oil, where May futures were in free fall, diving well below $15 and ballooning the spread between the first- and second-month contracts to a record.

The proximity of expiry is exacerbating the situation, which is set against a backdrop of swelling supplies and overflowing storage.

In the three weeks through April 10, Cushing stocks rose by nearly 16 million barrels, to 55 million.

It was nearly impossible to keep track of this in real-time Monday. The current contract was down nearly 30% at one point, inside $13/barrel. That’s the lowest since 1999. The intraday drop was the most since at least 1982.

June futures, on the other hand, were down a mere 9%, inside $23, putting the spread at a laughable ~$10.

“There is no limit to the downside to prices when inventories and pipelines are full”, Pierre Andurand said. “Negative prices are possible”.

Meanwhile, retail investors who (simply put) don’t understand how the market works, continue to plow money into oil ETFs, apparently without any conception whatsoever of the underlying dynamics.

Last week, USO said it would shift some of its holdings to the second-traded month due to the exigent circumstances or, as the fund puts it in the filing, “because of market conditions and regulatory requirements”.

Panning out to a more 30,000-foot view, the bottom line is that the OPEC+ deal was far too little, far too late, in the face of near-term demand destruction on the order of between 20 million and 30 million barrels per day.

Last week, the IEA said this month will go down as “Black April” and called 2020 the worst year in the history of global oil markets. Full-year demand, the IEA warned, is likely to be down 9.3 million barrels per day. That makes for a poignant visual.

Notably, that estimate assumes travel restrictions are eased in the second half of the year. That is, the projection won’t necessarily get better even if people are back in the air and back on the road in six months.

If the projection pans out, the IEA notes it will “erase almost a decade of growth”.

Read more: ‘Black April’ And ‘The Worst Year In The History Of Global Oil Markets’

From a geopolitical perspective, the fact that Riyadh and Moscow engaged in a price war amid a burgeoning pandemic in the first place doubtlessly undercut market confidence in the alliance, which has now been exposed for the star-crossed betrothal it always was.

Data from the EIA last week showed another record stock build stateside, and the demand destruction associated with virus containment protocols across the globe is quite simply unprecedented.

As for prices, the above-mentioned Andurand had a simple message for anyone dabbling in crude who may not be a seasoned veteran in the market. “Just be careful out there”, he cautioned. “Oil price is not like an equity price”.