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The movements in the oil market are enormous. The corona virus has paralyzed oil demand and has sent prices down. Even large production cuts from the OPEC oil cartel have not been enough to offset the drop in demand. The market is simply flooded with oil.
On Monday, the price of US light oil (WTI) fell 42 percent. Just before 6 p.m., the WTI’s top position is just over $ 10 a barrel. This is the lowest since 1986.
Portfolio manager Kenneth Tveter of hedge fund Svelland Capital believes that we can see a similar drop in the price of Ice Brent and believes that the price of oil will drop to $ 20 in the middle of next week.
A drop in prices of up to $ 20 a barrel from the current oil price equates to a drop of around 25 percent.
The former DNB analyst believes that many have overlooked the huge difference between the price of physical oil and the price of “paper oil,” that is, the negotiation of financial oil contracts.
“What we see at WTI now is something I think we can see in the burnt market over the next week and a half,” he says.
Although North Sea oil is not as affected on Monday, the price also falls here. The first burned position is now trading below $ 27 a barrel and is down 5 percent during the day
Think that many do not understand
There are countless types and products of oil that you can invest in through so-called listed funds or instruments (ETFs and ETNs). That means that anyone can speculate on the ups and downs of the price of oil. Tveter believes that many have seen that oil prices are relatively low compared to historical prices and that they buy contracts regardless of the difference with the underlying market.
– There is currently a strong disconnect between the physical oil market and the paper market, where they are going in opposite directions. The problem is that oil has become an asset class on a par with stocks. People buy oil without understanding what it means, says Tveter.
The manager believes that many do not understand that there is a great discrepancy between how the physical market values oil and how the financial market values oil.
– There is a great risk that many may not have realized how weak the underlying oil market really is, he says.
Historically high difference
On Thursday, the price of oil (Ice Brent) closed at $ 27.82 per barrel. The underlying price (Dated Brent), which is the benchmark for more than half of all oil sold in the world, ended at $ 18.86 per barrel. Therefore, the difference between the financial market and the physical market is the barrel of nine dollars. Historically, it has averaged less than a dollar.
– These are numbers that we have never seen before. The derivative must reflect the physical underlying market and at some point prices must converge, says Tveter.
Oil in the financial market, which Tveter refers to as a derivative, is traded in contracts that are settled every month. To establish themselves, they must be very close to the price in the underlying market.
When the difference is in the $ 9 barrel, that means something has to give up. That was essentially what happened to American light oil.
– Financial documents are beginning to go down to the physical market when there is now one day until the contract expires. Everyone with the front contract gets rid of it because they don’t want to end up with physical oil and the papers are largely sold, says Tveter.
The manager points out, among other things, to the USO, the world’s largest oil ETF, which on Friday received a new daily injection of capital of $ 552 million. The fund is now at $ 4.3 billion and recently launched a contract, meaning it sold a May contract and bought a June contract, and now owns 27 percent of all outstanding June contracts on WTI oil.
Think the “paper oil” gives up
Then there is the question of whether North Sea (burned) oil will drop or whether the physical market will rise sharply. Tveter believes that nothing indicates that the physical is rising.
– Demand has now dropped to 30 million barrels a day in April and OPEC cuts will not begin until next month. There is only one thing left. The paper has to go down and if it doesn’t, we don’t have a derivatives market that works well in the world’s most liquid oil contract, and that can’t happen, says the manager.
Trading derivatives contracts in the oil market has become huge. In March, Ice Brent’s average daily trading volume was 1.2 million contracts, equivalent to 1.2 billion barrels. In comparison, the total physical oil market is below 100 million barrels per day.
Reach at a high rate
In its report last month, the International Energy Agency (IEA) estimated that global demand in April is expected to be 29 million barrels per day less than in April last year. Opec + production cuts will only come in May.
– This means that every April to April we produce around 30 million barrels of oil that we don’t need, says Tveter.
With oil reserves full, he believes the price should drop enough to create new demand or to cover costs with additional storage. Finally, production must be stopped.
Commodity analyst Bjarne Schieldrop of SEB wrote in an analysis on Monday that US oil shale oil producers. USA They withdrew 66 oil rigs from production last week alone. The number of platforms in production is now 50% less than a year ago. More production equipment is expected to be retired in the coming months.
“This does not end until supply and demand are close to equilibrium and it is now far, far from the case,” writes Schieldrop.
The attention of market players is now focused on the capacity of oil reserves. The main oil reserves in Cushing Oklahoma, USA. In the USA, they are now at 69 percent of full capacity, up from 49 percent a month ago.
Oil analyst Oddvar Bjørgan at Carnegie still doesn’t think it’s critical. In the past three weeks, Cushing’s stocks have increased by 15 million barrels. Continuing at that rate, Bjørgan estimates that he still has 7 to 8 weeks before they fill up.(Terms)Copyright Dagens Næringsliv AS and / or our suppliers. We want you to share our cases using a link, which links directly to our pages. Copying or any other use of all or part of the content may only be made with written permission or as permitted by law. For more terms see here.
