21 April - update from our investment partners

  • 21st April 2020

The disruptions of coronavirus are setting more and more records in terms of economic data, we can now add oil pricing to that list.

What has happened

Global risk appetite faltered yesterday after a plunge in the price of oil futures rippled across broader assets. There were some extraordinary numbers on show with oil for May delivery trading at almost -$40 as traders were forced to pay other market participants to take oil off their hands.

How can the oil price be negative?

There are a lot of technical factors at work here. First and foremost is the difference between Brent oil and WTI oil. Brent Crude is predominantly a seaborne oil which means it is shipped by tanker to destinations with demand globally. Therefore, if demand dips tankers can either be rerouted to areas with demand or can be anchored in place until conditions improve. WTI is different however as it is a landlocked, pipeline crude which is delivered to Cushing, Oklahoma. If you are a trader with a contract for delivery of oil in May, broadly your two options are to deliver it to an oil consumer or to store it. The problem is that the storage tanks at Cushing, the largest oil-tank storage farm in the world, are close to capacity. Add in the huge contraction in demand due to coronavirus and you have a glut of oil with nowhere to go, this means traders with May contracts for oil delivery needed to sell oil at almost any price.

What does Brooks Macdonald think

As it stands at 10:30am on Tuesday the June WTI contract is trading at just below $15 with July at just below $21. The demand/supply volatility that we’ve seen over the last 24 hours may reoccur at on 18th May on the eve of the expiry of the June contract unless either demand picks up or storage issues can be resolved. Whilst these dramatic numbers are caused by the demand shock of coronavirus we should stop short of saying that the price of oil is now negative. As WTI is landlocked it is expensive to take to port and then move on to an oil tanker akin to Brent oil which represents around two thirds of world pricing. The cost of seaborne tankers have also surged in recent weeks making this arbitrage opportunity less attractive. What we saw yesterday was a classic squeeze where liquidity froze up due to a lack of buyers and many panicked sellers. The disruptions of coronavirus are setting more and more records in terms of economic data, we can now add oil pricing to that list.

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