When we published our article on oil yesterday before the market opened, we couldn’t have imagined that history would happen just a few hours later.
During a single trading session, oil contracts for the month of May plunged more than 190% into negative territory. This closed the session trading at negative $37.63. This means the seller would pay the buyer to take delivery of the oil.
That’s the lowest recorded price in history and highlights the utter despair in the oil industry right now. This is while it grapples with the nightmare scenario of record-setting inventory levels and a collapse in demand.
Industry Experts React
On the inventory side, Steve Puckett, executive chairman of energy consultancy TRI-ZEN International, says oil storage is “rapidly filling – exceeding 70% and approaching operating max.”
Ambitious traders tried to lease any storage space available to buy oil today. They also plan to sell it later when prices are expected to rebound. More than one Twitter joke inquired about draining the family pool and using it to store oil.
On the demand side, the International Energy Agency expects demand in April to be 29 million barrels per day less than a year ago. This level has not been seen since 1995.
While the May contracts priced into negative territory, the June contracts also took a massive hit yesterday. The June contracts were down 18% to $20.43 per barrel and the July contracts slipped 11% to $26.18.
Helima Croft, global head of commodity strategy at RBC Capital Markets, says there’s likely no silver bullet to fix the supply and demand imbalance. This will go on until the US economy is running again.
“… What has been hit the hardest by this pandemic has been vehicle traffic use. I mean, people are not flying. They are not driving. And so, this is a real story about storage filling up… until we get signs that U.S. gasoline demand is improving, that people are going to drive again, we are continuing to be very, very bearish on the demand outlook for oil.”
Doug Terreson, fundamental research analyst at Evercore ISI expects crude oil prices to “remain very weak” at least through the second quarter:
“… The problem is that in the near term, meaning the second quarter of 2020, supply is going to be over demand by around 15 million barrels per day or so, which, when combined with the 7-million-barrel build in the first quarter, puts us in a scenario whereby we’re probably not going to have enough storage to accommodate this supply. So, in this scenario, prices for crude oil are going to remain very weak.”
Jim Cramer, host of Mad Money, says what happened today simply shouldn’t happen.
“Really, this is a windfall for anyone with storage, because right now you could make fortunes simply being paid to take oil and stick it somewhere. Then you can sell it off at a higher price a month from now,” he said. “That’s a malfunctioning market that it couldn’t work today. It simply shouldn’t happen, and it didn’t involve a lot of volume.”
And Mark Vitner, senior economist at Wells Fargo, painted a slightly grimmer picture, particularly for Texas:
“I’m really concerned that this is going to usher in a much bigger wave of bankruptcies. Ultimately, we’re going to have to have a consolidation in the energy industry. It’s going to result in some pretty significant job losses,” Vitner said. He also reiterated that “It’s going to hurt Houston. It’s going to hurt Texas. There are other things that are going right in Texas, but, really, some of the higher-cost oil-producing regions in the United States, they may be in for some harsher adjustments.”
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