Oil Market Hasn't Bottomed Yet

The oil market remains under serious fundamental pressure - a result of a catastrophic drop in demand due to the coronavirus pandemic, as well as an increase in supply, which was a logical outcome of Russia-Saudi Arabia price war. Market imbalance encourages producers to store oil in a bid to its eventual recovery. But these expectations of higher prices in the future only exacerbate current decline due to a reduction in free oil storage.

Historic events are currently happening in the oil market. The US WTI May futures went negative, closing at - $37.63 per barrel for the first time since the contract inception in 1983. After the expiration of oil, the buyers must physically take delivery. And in May there is nowhere to take it. Due to the recent crash in demand, oil storage facilities are already full. That's why those who had been holding the contracts until the last moment, were ready to get rid of it and even pay someone to take their oil. Under these conditions, investors begin to trade futures with later delivery dates. Oil contracts for later delivery are traded at much higher prices than those expiring in May, which means that investors lose money every time their current contract expires. Analysts call this situation “super contango”.

It is worth noting that the slump in oil prices continues despite the recent deal to cut global oil output between OPEC and 20 other oil-producing nations. Earlier this month, key oil producers, including Saudi Arabia, Russia and the United States, agreed to reduce production by 9.7 million barrels. However, market participants doubt the effectiveness of these measures. The output cuts are unlikely to remove the existing oversupply and market excess and compensate for the drop in demand, which this month alone is estimated at 30 million barrels per day. According to the OPEC Secretary-General, there could be a colossal excess volume of 14.7 million barrels a day in the second quarter of 2020.

During the emergency virtual meeting, held by OPEC+ to discuss the dramatically changing situation in the oil market, the participants finalized the deal to slash oil production by 9.7 million barrels a day starting May 1. Earlier, it was expected that the parties could start implementing the agreed oil cuts right away rather than wait until May 1. Since in the current conditions even the ones “responsible for maintaining a balance” in the oil market can help it, the decline in prices will continue. At the same time, we recommend taking a closer look at the support at $ 15 per barrel, which is the closest target. Considering that Brent is now quoted above $ 20, we are talking about a potential 25% profit, which can be obtained as soon as in the next 2-3 weeks.