May WTI turns negative, June contract dragged lower

Commodities

I never thought I would see the day when oil would be this low. WTI plunged into negative territory for the first time ever, with the May contract falling as low as -$40 today.  While this is biggest collapse in our lifetime for crude prices, it’s rather misleading. June only fell about $4 to $21 Our Futures contract rolled to June on Friday-Sunday, so Futures reflect the June contract now. It’s fair to say the meltdown in the May contract has the made the Jun contract wobble but the May contract is so out of step with the term structure of the market that it will not be sustained. This level of dislocation suggests a severe problem in market functioning, perhaps a hedge fund blowing up or similar.

 The oil market is in a super contango where prices in the future are higher than the near month. This is because demand has collapsed in the short term but output cuts by OPEC are yet to take effect so the world is awash with crude with nowhere to put it. It’s a complete clear out in spot and traders expect the market to rebalance only rather slowly.

 The market has given up on May WTI as storage capacity fills up – we could be at ‘tank tops’ by mid-May. All the storage at Cushing etc is close to the brim. So no one wants to take delivery of oil now. Moreover, the OPEC+ cuts won’t really kick in until next month. So trading desks globally gave up on the May contract a few days back and volume has collapsed. CME Group data indicates volume at 122k for May contract vs 780k for Jun. No one wants oil now and no one can take delivery. But it’s also fair to assume that with demand not able to recover and the US unable to agree on output curbs we will also see the June contract come in sharply to the mid-teens also. 

 The market is hoping that WTI will be higher in the coming months but demand won’t bounce back and already the glut of Q1 is threatening to overwhelm storage capacity. Demand destruction is so mammoth, and storage already so strained, I would struggle to see anyone wanting to take delivery in Jun or Jul either. You should note that Brent is much more stable, albeit still pressured to the downside, as OPEC+ cuts are due to take effect and storage constraints are less pronounced.

Neil Wilson – chief market analyst

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