Take note of this date: May 11. By then, if the math is
right, the physical price of U.S. crude should be back in negative
territory—though I have a hunch it will happen earlier.
As everyone still probably has vivid memories of last week, the collapse of West Texas Intermediate futures to sub-zero levels came after the physical market first slumped to such hitherto unseen prices.
As
of April 14, the physical price of WTI was already at $16 per barrel
when futures for May were trading as high as $23. On April 17—five days
before expiration—the May contract was still hitting daily highs above
$20, while the physical price had already slid to $14.25.
Of
course, over the course of the next 72 hours, everything the U.S. crude
market had become known for, as a global benchmark of oil since the
early 1980s, disintegrated.
Oil’s “Black Monday” Set For Rerun
On
oil’s “Black Monday,” April 20—the stock market has multiple iterations
of black days and it was about time oil got one—May WTI raced down the
abyss, matching the physical market’s quote dollar-for-dollar, to minus
$40 at one point.
WTI Daily May Contract
Freefalling
May WTI plunged 440% at one juncture, as those stuck with the worthless
expiring contract couldn’t find a single buyer in a
pandemic-annihilated market. However, after its April 20 settlement of
minus $37, May WTI was finally at home with its physical avatar, and
laid to rest two days later at under $14.
Now
fast forward to this week: June WTI, U.S. crude’s new embodiment,
suffered another jaw dropping 25% on Monday, though in dollar terms, it
was only just over $4—to settle at $12.78. By Tuesday afternoon in Asia
(0400 GMT), June WTI was down another 14%, or nearly $2, to a session
low of $10.66.
And it could fall at least another $2 over the next 24 hours. Why?
Physical Market Driving Futures Lower
Because
the physical market for WTI was already as low as $8.50 by Monday’s
close. And it gets more interesting when you look at the math to see
where it could go from here.
WTI June Futures 300 Minute Chart
From
its April 14 price of $16, physical WTI has lost almost $8 or 50% over
the course of just two weeks. At this rate of attrition, June WTI could
get to negative in two weeks—which would roughly be on May 11, or about a
week before its May 19 expiration. The likelihood of it happening
within the next few days is, of course, just as great.
If
what happened to May WTI is any guide, then the replay of sub-zero
pricing, with June in the driver’s seat, could be worse. The question,
of course, is how much worse.
Minus $100 WTI This Time?
Mizuho
oil analyst Paul Sankey thinks it could be in the three-digits as fear
grows by the day that U.S. crude will run out of storage space
soon. “Will we hit -$100/bbl next month?” Sankey asked in a note last
week, then answered the question himself, saying, “quite possibly.” He
added:
“The physical reality of oil is that it is difficult to handle, volatile, potentially polluting, and actually useless without a refinery.”
There are very few analysts out there, including those
who’ve lived a life of looking at oil in a positive way, that will argue
against June WTI going to zero or below. Proof of it is the lightning
defections made to July WTI by investors who would typically be in the
front-month contract, if only not for the demand loss of some 20 million
to 30 million barrels per day versus production cuts at less than half
of those levels.
Make no mistakes
about it, volume in June is definitely higher than July by about 200,000
lots, or 200 million barrels. But open interest in the front-month—the
key indicator of liquidity—was lagging the nearby contract by almost
55,000 lots or 55 million barrels.
June WTI’s open interest as a whole has dropped 255,000 lots or 255 million barrels over the past week.
Hedge Fund-Like USO Adds To Spot WTI’s Pain
And
most tellingly, June WTI was at a discount of $7 per barrel to July—not
the super contango of last week, but that could still happen with
another three weeks to its expiration.
The liquidity ruin in June WTI was hastened, of course, by the United States Oil Fund (NYSE:USO),
which unexpectedly moved to sell all its holdings in the most active
U.S. crude futures contract so that it could spread its risk further
down the calendar to June 2021.
USO said its move, which
significantly widened WTI's June-July spread, was due to new limits
imposed upon it by regulators and its broker.
Yet
it was quite ironic to see an exchange-traded fund, whose original
purpose was to mirror WTI’s front-month, now dictating its
direction—somewhat like a hedge fund.
No comments:
Post a Comment