Negative $40 oil reflects panic - and U.S. crude market economic reality

By David Gaffen

 

FILE PHOTO: A maze of crude oil pipes and valves is pictured during a tour by the Department of Energy at the Strategic Petroleum Reserve in Freeport, Texas, U.S. June 9, 2016. REUTERS/Richard Carson

 

(Reuters) - Traders desperate to avoid owning oil fled the markets on Monday, sending crude futures into negative territory for the first time ever, in recognition that the coronavirus pandemic has sapped demand for fuel and there is not enough storage for the massive glut of oil present on U.S. soil.

 

Investors sold the May futures contract due to expire on Tuesday in a series of waves. At one point the contract hit negative $40. When the trading stopped, crude oil had ended the day at a negative $37.63 a barrel, a decline of some 305%, or $55.90 a barrel.

 

For as sudden as the day's declines were, it was weeks in the making. The coronavirus pandemic cut fuel demand worldwide by roughly 30% beginning in early March, but for several weeks, the supply of oil worldwide has continued to build. Even the recent deal by OPEC and other major oil-producing countries to reduce supply will not be fast enough, nor large enough, to drain the millions of barrels of unneeded crude present in the markets.

 

That unwanted oil is instead going into storage, but in the United States, storage is filling much more quickly than anticipated. Cushing, Oklahoma, the tiny town of less than 10,000 people that serves as the main U.S. storage hub, was 70% full as of last week, and traders say it will be full within two weeks.

 

That realization sparked Monday's sell-off in U.S. futures markets because of the technicalities of the West Texas Intermediate futures contract, which expires on Tuesday. When oil contracts expire, the holder has to take possession of 1,000 barrels of oil for every contract they own, delivered to Cushing.

 

However, with Cushing filling up, that leaves traders with the unappetizing option of taking oil they do not want, or getting out of those positions.

 

The mad rush for the door means there were few buyers, and the contract dropped from a normal price of $18 on Friday into unprecedented negative territory.

 

"We saw a total collapse in the market. There was everybody selling it into the hole with no buyers," said Phil Flynn, senior market analyst at Price Futures Group. "They're going to have to drive down to a price where someone wants to buy it, and no one wants to buy it."

 

For the first few hours of trading on Monday, the May oil futures steadily edged lower, widening the gap between that contract and the June contract, which, while weak, still ended the day at more than $20 a barrel. But with expiration on the way on Tuesday, the selling accelerated in the last two hours, with oil finally hitting negative territory roughly 20 minutes before the close of trading.

 

(GRAPHIC: Oil contract gap - https://fingfx.thomsonreuters.com/gfx/editorcharts/xklpyylgpgd/index.html)

 

Once that level was breached, sellers piled in, sending the contract at one point below negative $40 a barrel before a slight rebound ended what will go down as the worst day since the West Texas Intermediate <CLc1> contract was introduced in 1983.

 

"I’m 55 years old, and I worked on the trading floor in college. I’ve been through the first Gulf War, second Gulf War, World Trade Center, dot-com crisis, and nothing came close to this,” said Bob Yawger, director of energy futures at Mizuho in New York. "It could get worse. This situation that we’re in is that bad."

 

COULD GET WORSE

Analysts say this type of market dislocations could recur in coming months because fuel supply will outweigh fuel demand for the foreseeable future. Worldwide oil consumption is roughly 100 million barrels a day, but consumption fell by 30% globally, or about 30 million bpd, beginning in early March.

 

However, it took the Organization of the Petroleum Exporting Countries, Russia and other countries until early April to agree to cut supply by 9.7 million bpd. Other nations, like the United States and Canada, did not mandate cuts from private industry, but those companies are swiftly reducing output.

 

"Activity is in free-fall in North America and is slowing down internationally," said Halliburton Co <HAL.N> CEO Jeff Miller, on a company earnings call Monday.

 

It will nonetheless take months before those cuts fall enough to come in-line with reduced demand - even if world economies rebound somewhat as people recover from the pandemic, which has killed more than 165,000 people worldwide. With storage soon to be completely full in the United States, crude will not have a place to go.

 

Crude stockpiles at Cushing rose 9% in the week to April 17 to around 61 million barrels, market analysts said, citing a Monday report from Genscape. The hub has capacity for roughly 76 million barrels.

 

"It’s clear that Cushing is going to fill and it will stay full for the next several months," said Andy Lipow of Lipow Oil Associates.

 

Unless production is cut more swiftly, next month could see a repeat of Monday's frenzied activity with the June contract, which settled at $20.43, or $58 more than the impaired May contract.

 

"We're probably unfortunately going to see this dislocation in these energy contracts remain in place for next month as well," said Edward Moya, market analyst at OANDA. "You're going to see this remain in place until we really start to see the oil giants, the Exxons, the Chevrons, just be forced to stop production."

 

(GRAPHIC: U.S. oil futures contracts show gigantic gap - https://fingfx.thomsonreuters.com/gfx/ce/nmopaaodpab/oil gap.PNG)

 

(Reporting by David Gaffen; additional reporting by Laura Sanicola, Jessica Resnick Ault, Stephanie Kelly and Devika Krishna Kumar; Editing by Nick Zieminski, David Gregorio and Lisa Shumaker)

 

-- © Copyright Reuters 2020-04-21

 

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OMG! The price of oil is not something to be ignored. This is not a good omen.

Edited April 20, 20206 yr by timendres

Damm cheep gas but can’t travel oh the humanity’s 

33 minutes ago, timendres said:

OMG! The price of oil is not something to be ignored. This is not a good omen.

Listening to an oil industry commentator today he suggested that the impact on US employment could be severe with hundreds of thousands of layoffs, especially within shale oil as producers are still heavily indebted.

Once the frackers all collapse the price will go back up. Saudi Arabia is being pretty stupid. I can't even think what their strategy is? The shale is still in the ground once they go bankrupt doing this. KSA is seriously hurting in regards to their cash reserves. Theirlast bright idea was to buy 10% of carnival cruise lines. 

 

Normally oil is just too greasy (pardon the pun) to interest me. However the commodity interests me now. If never recovers it means there is no world left as we know it anyway. You would have to be nuts to buy futures on it in the foreseeable future. That's just paper however.

 

I will go out on a limb and guess oil is back up to $30 in 6 months or  a year at most. If not the paper in our wallets will be as worthless as the oil in barrels. Potatoes worth more than gold.

 

I would think the Chinese are drooling over this and building mega storage. 

Remember all the 'peak oil' scares in the 1980s and 1990s where we were about to run out of oil causing TEOTWAWKI?

This just shows how daft all the environmental scares are, the nutters have no idea of what the future holds.

There's so much oil, the world has nowhere to store it!

13 minutes ago, simple1 said:

Listening to an oil industry commentator today he suggested that the impact on US employment could be severe with hundreds of thousands of layoffs, especially within shale oil as producers are still heavily indebted.

 

Also lots of banks and ETFs are jumping on the Positive ESG thing. Many such as JP Morgan, Goldman and others will no longer finance fracking, So the play seems to be that they keep oil down long enough to permanently stamp the frackers out. 

 

Once that happens they will try to squeeze. However as soon as the price hits $40 again the cycle will repeat itself. 

 

As of today America has lost it's energy independence for the moment.

 

Forgot to add unless you meant oil/gas workers specifically we are going to be losing tens of millions of jobs. 

Edited April 20, 20206 yr by Cryingdick

20 minutes ago, Cryingdick said:

Once the frackers all collapse the price will go back up. Saudi Arabia is being pretty stupid. I can't even think what their strategy is? The shale is still in the ground once they go bankrupt doing this. KSA is seriously hurting in regards to their cash reserves. Theirlast bright idea was to buy 10% of carnival cruise lines. 

 

Normally oil is just too greasy (pardon the pun) to interest me. However the commodity interests me now. If never recovers it means there is no world left as we know it anyway. You would have to be nuts to buy futures on it in the foreseeable future. That's just paper however.

 

I will go out on a limb and guess oil is back up to $30 in 6 months or  a year at most. If not the paper in our wallets will be as worthless as the oil in barrels. Potatoes worth more than gold.

 

I would think the Chinese are drooling over this and building mega storage. 

Truly sad days for an amazing industry.

Your $30 prediction is likely to come true as the world open up again we will probably see planes fly half empty and more people avoiding public transportation and drive themselves creating the demand needed to support crude prices.

44 minutes ago, Cryingdick said:

Once the frackers all collapse the price will go back up. Saudi Arabia is being pretty stupid. I can't even think what their strategy is? The shale is still in the ground once they go bankrupt doing this. KSA is seriously hurting in regards to their cash reserves. Theirlast bright idea was to buy 10% of carnival cruise lines. 

Wasn't it Russia which started this. They refused to lower their output to which Saudi Arabia responded by increasing their volume. 

 

US shale oil production is first to go as its more expensive way to get oil. 

 

The good part of all of this is that many cities have now a lot clearer skies. When people get used to less polluted air, they might not go back to the dirty past. 

 

USA is still oil independent if it wishes to be. They have capacity of producing enough oil. It just costs a bit more per barrel of oil, compared when buying the oil from abroad. 

4 minutes ago, TheDark said:

Wasn't it Russia which started this. They refused to lower their output to which Saudi Arabia responded by increasing their volume. 

 

US shale oil production is first to go as its more expensive way to get oil. 

 

The good part of all of this is that many cities have now a lot clearer skies. When people get used to less polluted air, they might not go back to the dirty past. 

 

USA is still oil independent if it wishes to be. They have capacity of producing enough oil. It just costs a bit more per barrel of oil, compared when buying the oil from abroad. 

 

If the government subsidizes it then sure. But energy independence has been lost in that sense. I have noticed nice clean skies myself. No jet trails. You could substitute might not go back to unable to go back. In the near term nothing replaces oil. It's the same as before but nobody has any money if this continues another two weeks. 

 

I am sure Trump will simply use tariffs. I think that is a little ways off as we might as well enjoy $1 a gallon gas while we have no jobs and 60% of the country is now unemployed.

 

Now that there is nowhere to put oil the Russians and Saudis don't have another play. Last time I looked the Saudis are 2 or three years away from insolvency. They also have no other resource but have opened to tourism lately. lol 

 

The Saudis are about to be left to hang. 

1 hour ago, Cryingdick said:

Forgot to add unless you meant oil/gas workers specifically

Yes

8 minutes ago, simple1 said:

Yes

 

Well you are looking at millions unemployed even by that metric because the high paying jobs from the fracking sector keep every sector going in rural areas. If/when things come back online only 1 out of 5 mom and pop restaurants will reopen. Puckerbush West Virginia doesn't have a shop, restaurant, bicycle shop without the 6 figure gas jobs. 

 

Amazon will have more money than the federal government in six months.

 

 

Edited April 21, 20206 yr by Cryingdick

Never thought I would see headlines like Reuters: US crude oil up $20, still negative.

 

Talk about turning markets upside down, would you make money or loose it?

 

Everything is unpredictable. If I were investing right now, the number I would watch is the number of unrecorded asymptomatic cases. A few random samples suggest that may be much higher than previously thought. That could signal and unprecedented exit to the problem. But who knows?

Edited April 21, 20206 yr by rabas

13 minutes ago, rabas said:

Never thought I would see headlines like Reuters: US crude oil up $20, still negative.

 

Talk about turning markets upside down, would you make money or loose it?

 

Everything is unpredictable. If I were investing right now, the number I would watch is the number of unrecorded asymptomatic cases. A few random samples suggest that may be much higher than previously thought. That could signal and unprecedented exit to the problem. But who knows?

 

It is hyperbole to an extent. Oil is still worth something the futures contracts that expire tomorrow are not. 

 

As far as investing the market is winner takes all and last man standing. Walmart trades at all time highs with Amazon and should continue to go up. Once Macys, JC Penney, Nordstoms etc go out of business that money will find a new home. 

 

Also airlines wait until some get killed off so that the math makes sense in the players that are left. I would get out of S&P index funds if I am going to retire. They are completely broken now. Why own an index fund including airlines, oil companies (not oil itself), casinos, hotels, cruise lines, car makers, etc. That's nuts.

 

I recommend something like a cloud ETF or even just ishare nasdaaq. There are so few companies with any actual value right now that they stick out. Alcohol is good people are staying home more becoming depressed and becoming more dependent. Alcohol sales are as high as they have been since prohibition.

Edited April 21, 20206 yr by Cryingdick

2 hours ago, Cryingdick said:

Once the frackers all collapse the price will go back up. Saudi Arabia is being pretty stupid. I can't even think what their strategy is? The shale is still in the ground once they go bankrupt doing this. KSA is seriously hurting in regards to their cash reserves. Theirlast bright idea was to buy 10% of carnival cruise lines. 

 

Normally oil is just too greasy (pardon the pun) to interest me. However the commodity interests me now. If never recovers it means there is no world left as we know it anyway. You would have to be nuts to buy futures on it in the foreseeable future. That's just paper however.

 

I will go out on a limb and guess oil is back up to $30 in 6 months or  a year at most. If not the paper in our wallets will be as worthless as the oil in barrels. Potatoes worth more than gold.

 

I would think the Chinese are drooling over this and building mega storage. 

There was an article in the Financial Times explaining SA’s strategy, it’s paywalled so so haven’t posted a link.

 

Needless to say it is a strategy and it is working.

 

The price is collapsing because there is no demand, Big Oil is hurting and there’s no point making phone calls.

Does this mean the gas station is gonna pay me when i go fill up my tank today? 

2 hours ago, BritManToo said:

Remember all the 'peak oil' scares in the 1980s and 1990s where we were about to run out of oil causing TEOTWAWKI?

This just shows how daft all the environmental scares are, the nutters have no idea of what the future holds.

There's so much oil, the world has nowhere to store it!

I was told in the early 1960s that oil would run out in 20 years.

 

It's BS that they can't store it, IMO. The country that built thousands of ships, planes and tanks to win WW2 can certainly build some storage tanks for oil.

I have no doubt someone is going to get very very rich over this IMO fake crisis.

1 hour ago, Cryingdick said:

The Saudis are about to be left to hang. 

I'd say many westerners that worked there will be cheering if that happens. The only reason many of us didn't leave 3 months after arriving was because they paid us a large amount to stay there.

Edited April 21, 20206 yr by thaibeachlovers

Saudi and other Arab countries can only turn their attention to China which is well positioned to act as white knight. They can easily take over Aramco with their large sovereign fund and they have the largest influence on demand. Will the SA stay faithful to the petro dollar or abandon for petro yuan. Will be a disaster if petro dollar be the sacrificial lamb and big woes for the dollar position and US economy. 

3 hours ago, TheDark said:

Wasn't it Russia which started this. They refused to lower their output to which Saudi Arabia responded by increasing their volume. 

 

US shale oil production is first to go as its more expensive way to get oil. 

 

The good part of all of this is that many cities have now a lot clearer skies. When people get used to less polluted air, they might not go back to the dirty past. 

 

USA is still oil independent if it wishes to be. They have capacity of producing enough oil. It just costs a bit more per barrel of oil, compared when buying the oil from abroad. 

Actually it was Saudi Arabia who started the "war on shale" in November of 2014. I remember it well, because its the month I got out of the industry. Russia was only giving a "second attempt" at trying to regain market share, and no doubt continuing the "war on shale". Unfortunately for Russia, there supposed friends the Saudis weren't going to go along with Russia, and they didn't give a <deleted> of about Russia in 2014, and 15 during that pump until you drop scenario when Saudi tried to unseed U.S Shale. There's no honor among thieves.

Some troll posts have been removed. 

4 hours ago, Cryingdick said:

I will go out on a limb and guess oil is back up to $30 in 6 months or  a year at most.

 

Not really a limb. September futures right now are still above $30. It's only this expiring contract that went negative.

22 minutes ago, Aspaltso said:

Actually it was Saudi Arabia who started the "war on shale" in November of 2014. I remember it well, because its the month I got out of the industry. Russia was only giving a "second attempt" at trying to regain market share, and no doubt continuing the "war on shale". Unfortunately for Russia, there supposed friends the Saudis weren't going to go along with Russia, and they didn't give a <deleted> of about Russia in 2014, and 15 during that pump until you drop scenario when Saudi tried to unseed U.S Shale. There's no honor among thieves.

How do you spell HUBRIS with oil barrels. Why is everything everybody else does in this field for some strange reason only concerned with US shale. Please try to be a little bit less self centred. Other countries have their own economies to look out for, The gulf countries, Norway, Scotland (Oil stolen by England to fund tax cuts) Venezuela (Soon to be invaded by the the regime change champions of the world), Russia, Mexico.  Shale oil is filthy stuff which costs a lot per barrel to produce. The world would be better off without it. SA and Russia have every reason to respond to the decreasing world demand which is the inevitable result of Covid without either of them giving a tuppeny damn about the US economy one way or the other.

2 hours ago, thaibeachlovers said:

I was told in the early 1960s that oil would run out in 20 years.

 

It's BS that they can't store it, IMO. The country that built thousands of ships, planes and tanks to win WW2 can certainly build some storage tanks for oil.

I have no doubt someone is going to get very very rich over this IMO fake crisis.

The world’s oil storage is already at near full capacity, and nobody knows how long the economic recession will last.

 

Your idea of building more storage will not make anybody rich.

2 hours ago, thaibeachlovers said:

I'd say many westerners that worked there will be cheering if that happens. The only reason many of us didn't leave 3 months after arriving was because they paid us a large amount to stay there.

Speak for yourself.

 

 

5 hours ago, Cryingdick said:

Saudi Arabia is being pretty stupid. I can't even think what their strategy is?

That their oil is the cheapest on the cost curve and they have the resources to ride this one out.

I wonder if they are buying back the oil they recently sold for $40 a barrel?

Talk about cornering a market...

2 hours ago, thaibeachlovers said:

I was told in the early 1960s that oil would run out in 20 years.

 

It's BS that they can't store it, IMO. The country that built thousands of ships, planes and tanks to win WW2 can certainly build some storage tanks for oil.

I have no doubt someone is going to get very very rich over this IMO fake crisis.

Tell me how you can build all this storage and make money off it....

27 minutes ago, Nigel Garvie said:

 Shale oil is filthy stuff which costs a lot per barrel to produce. The world would be better off without it. SA and Russia have every reason to respond to the decreasing world demand which is the inevitable result of Covid without either of them giving a tuppeny damn about the US economy one way or the other.

Prejudice? Shale oil is some of the lightest, sweetest, clean oil there is.  So nice that most refineries must mix it with dirty oil to refine it.

 

 

14 minutes ago, rabas said:

Prejudice? Shale oil is some of the lightest, sweetest, clean oil there is.  So nice that most refineries must mix it with dirty oil to refine it.

 

 

hardly the cheapest though...which is the issue here: