Marius Paun | London, UK | Senior dealer | Thursday, 23rd April 2020
The coronavirus pandemic has delivered a massive blow to the economic activity around the world. Hardly any planes fly, a lot fewer cars are on the roads, all of which means the demand for crude plunged significantly. Meanwhile, crude supply has not dropped, certainly nowhere near as much as demand. If anything, recently the big producers seemed keen to pump as much as they could, in an attempt to destroy competition and gain market share. The Saudis are fighting the Russians for the Asian markets and both would like to see the US shale sector go bankrupt. That huge imbalance triggered a steep fall in crude oil prices, already down more than 60% for the year.
It culminated with WTI crude May contract going into negative on Monday and making headlines worldwide. As we mentioned already in the previous crude report the move was exacerbated on a technicality, the rolling over from WTI futures front-month contract, from May to June. As a matter of fact, there was a massive rally in WTI May on Tuesday from -$40 to +$9.06 at the time of expiry. Open interest fell to 13,044 contracts so over 13 million barrels of oil were up for delivery at Cushing, Oklahoma.
Brent crude also declined but was nowhere near zero or below. That is because between the European benchmark (Brent) and the US benchmark (WTI – West Texas Intermediate) there are some differences. The first one is that the timing of contracts expiry is different. WTI May expired on Tuesday whereas Brent crude was already pricing June as the first month. It meant that anyone holding WTI May either had to take delivery of that oil with storage running almost to full capacity or was forced to sell to close the position. That feature did not apply to Brent crude.
Secondly, as the Financial Times described it, Brent is a “seaborne crude”. If the buyer is struggling to find storage space it can rent an oil tanker and move that crude around immediately. In comparison, WTI is mainly delivered at the oil hub in Cushing, the US state of Oklahoma and that storage hub is reported to have rented out most of the spare capacity already. Stephen Schork, editor of the oil-market newsletter ‘The Schork Report’ said he expects access to storage capacity in the US to be exhausted within two weeks. The problem now for Brent is the charter rates for those oil super-tankers have doubled in the last month so the floating storage is next incoming under pressure.
Recently, the US Congress refused to fund federal purchases of crude but President Trump said he’s determined to store the excess oil that cannot be stored in commercial facilities into the strategic petroleum reserves. At a news conference, he said “We’re filling up our national petroleum reserves, the strategic reserves, and we’re looking to put as much as 75m barrels into the reserves. We’re going to either ask for permission to buy it, or we’ll store it, one way or the other, it will be full.”
Clawing back some of the historic losses seen on Monday, WTI jumped over 19% yesterday. Brent crude moved below $16 per barrel in early trading, hitting a 21 year low of $15.97 but then rallied for the rest of the session, settling at $20.37, over 5% higher.
Media reported that crude prices were also supported by President Donald Trump who tweeted that he ‘instructed the US Navy to shoot down and destroy any Iranian boat if they harass our ships at sea’. However, none of this rhetoric is really addressing the underlying oversupply. That is probably why, starting yesterday the Chicago Mercantile Exchange introduced options with a negative strike on crude futures. That may suggest CME for one, is pondering if negative prices could happen again.
The short-term chart for Brent crude shows a downtrend but less steep than WTI. Furthermore, the 6-day moving averages is now pointing upwards. If the bulls will manage to push the price above $22.4, the next resistance, it could cross above the 21 day moving averages giving a bullish signal. That could attract additional buying power and the momentum could push the price towards $25.3 followed by $27.15 the next targets on the upside.
On the downside, if the selloff resumes look for support around $20 mark. If that is broken it would signal the rebound was nothing more than a dead cat bounce. The sellers would be encouraged to retest the next support just above $18.00 and ultimately $15.97, the 21 years low seen on Tuesday 22nd April.