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NEW YORK (BLOOMBERG) – The day began like any other gloomy Monday in the worst oil market crisis in a generation. It ended with prices dropping below zero for the first time in history, pushing markets into a parallel universe where traders were willing to pay $ 40 a barrel just to have someone take the crude out of their hands.
West Texas Intermediate (WTI) futures have been the benchmark for the U.S. oil industry for decades, seeing the market through booms, riots, wars, and financial crises, but no one-off event has a candle in this sense. At the end of the trade, the contract had collapsed 300 percent from $ 17.85 a barrel to minus $ 37.63.
“Today was a devastating day for the global oil industry,” said Doug King, a hedge fund investor who co-founded the Merchant Commodity Fund. “Storage in the United States is full or compromised and some unfortunate market participants took place.”
In a sense, it was an extreme technical problem as merchants prepared for the contract’s expiration for delivery in May. Elsewhere, the market advanced normally: Brent futures, the benchmark for Europe in London, closed the day sharply lower, but still above $ 25 a barrel. WTI for June delivery changed hands at $ 21 a barrel.
But negative prices also revealed a fundamental truth about the oil market in the coronavirus era: The world’s top product is rapidly losing its value as the chronic oversupply overwhelms the world’s crude oil tanks, pipelines, and supertankers. . Ultimately, traders became desperate to avoid having to receive real oil because nobody needs it and there are fewer and fewer places to put it.
GLOBAL AGREEMENT
Despite OPEC’s agreement to cut 10 percent of world output, praised by United States President Donald Trump just over a week ago, the oil market crisis is worsening. Defeat will send a deflationary wave through the global economy, complicating the task facing central banks trying to keep economies afloat as the pandemic continues to paralyze business and travel around the world.
The collapse in prices could redraw the global map of power, as petrostats like Russia and Saudi Arabia, which enjoyed a resurgence in the last 20 years thanks to an unexpected oil gain, saw their influence diminish. Exxon Mobil, Royal Dutch Shell and other oil giants are breaking business plans, desperate to conserve cash.
WTI is the world’s most traded financial oil contract, a benchmark followed by Zurich to New York and Tokyo. But as each month a futures contract nears expiration and traders transfer their positions to other contracts, the real, physical world of the WTI becomes very small, centered in Cushing, an oil city in Oklahoma where it serves a huge pipeline hub. and storage tanks. as the actual delivery point for barrels.
In the past three weeks, crude has been flowing into Cushing at breakneck speed, averaging 745,000 barrels per day and absorbing more oil than is consumed by a mid-size European nation like Belgium. At that rate, the tanks will be full before the end of May, something that has never happened before.
ETF FEVER
The days before maturity are often volatile, as traders make the switch from a paper market to a physical one. Until a few days ago, the May contract had been backed by huge financial flows from institutional and retail investors who invested money in oil through exchange-traded funds.
The largest crude ETF, known as the US Oil Fund, has received billions of dollars in fresh funds in recent weeks, accumulating a fifth of all pending contracts in the May futures contract. But last week, he included his position in the June contract and evaporated from May. Without the fund, the contract was abandoned to the forces of physical supply and demand.
As the market opened early Monday morning in Asia, the May contract traded at $ 17.85. Since New York merchants were shooting workstations in their makeshift home offices, it was less than $ 15.
Then prices really started to drop, making history to the downside. At 8 am New York time, the decline had reached 37 percent, the largest intraday decline since futures began trading in 1982. At around 11 am, it exceeded the US $ 10.35 low set at the 1998 oil recession. About an hour later, it brought out $ 10 a barrel.
‘NOT A SINGLE OFFER’
When CME Group, which manages the exchange where WTI futures are traded, said prices could go negative, the sale accelerated. At 1:50 pm, the contract was below $ 1 a barrel. Less than 20 minutes later, prices dropped to zero for the first time and continued to drop.
“No deals. Mental!” Said a trader from a major trader in a vain attempt to explain the collapse when prices turned negative. “There are no offers; not a single offer,” said another in London. “Ridiculous,” said a third senior merchant in Geneva.
The contract settled at less than $ 37.63, a drop of $ 55.90. And there is still another day of trading before it finally expires.
“The May crude oil contract is coming out not with a moan, but with a primary cry,” said Daniel Yergin, a Pulitzer Prize-winning oil historian and vice president of research and information company IHS Markit.
Even discounting the rarity of the May contract slump in negative prices, the world of physical oil suggests widespread pain.
Many refineries and pipeline companies told producers on Monday that they would only take their oil if paid. The daily price bulletin for Enterprise Products Partners, one of the largest pipeline companies in the United States, showed negative prices for all the crude it purchases. Another giant, Plains All American Pipeline, said the same to producers.
Bob McNally, an oil consultant and historian, said the energy market was “becoming familiar with the operation of the oil price mechanism” and why “for most of the history of oil, industry and governments strive to stabilize prices through control of supply, be it a tolerated cartel, government regulation, or both. “
The OPEC + coalition of oil-producing countries has failed to stop the defeat. Saudi Arabia, Russia and other producers announced a week ago a landmark agreement to cut world production by almost a tenth, or 9.7 million barrels per day, since May. The United States, Canada, Brazil and others have said that their own production is also falling as companies stop drilling new wells.
For Trump, who personally negotiated the Opec + deal, negative prices mean more trouble in the US oil patch. USA Pressure is mounting within the Republican party to use trade barriers to save the shale industry, including the imposition of tariffs on foreign oil.
But the market, negative prices and all, is not waiting for OPEC to reduce production or for tariffs to decrease imports. Rather than being an isolated event, Monday’s unprecedented crash in the oil market serves as a warning of more pain to come.
“If global storage worsens faster,” said veteran Citigroup oil analyst Ed Morse, “Brent could chase WTI to the bottom.”
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