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Oil’s Scary Replay: Physical U.S. Crude Could Go Negative In 2 Weeks

By Investing.com (Barani Krishnan/Investing.com)CommoditiesApr 28, 2020 05:06AM ET
www.investing.com/analysis/oils-scary-replay-physical-us-crude-could-go-negative-in-2-weeks-200522859
Oil’s Scary Replay: Physical U.S. Crude Could Go Negative In 2 Weeks
By Investing.com (Barani Krishnan/Investing.com)   |  Apr 28, 2020 05:06AM ET
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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
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
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.

Oil’s Scary Replay: Physical U.S. Crude Could Go Negative In 2 Weeks
 

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Oil’s Scary Replay: Physical U.S. Crude Could Go Negative In 2 Weeks

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Comments (21)
Rushi Shah
Rushi Shah May 05, 2020 11:25AM ET
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Barani Krishnan With all due respect, I hope you know 11 May, 2020 is approaching and eagerly waiting for view till then.
Drew North
Drew North Apr 29, 2020 11:46AM ET
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oil up over 30% immediately after article is written?
Drew North
Drew North Apr 29, 2020 7:48AM ET
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Oil up 16% the day after your bearish article...hows that look?
Richard Seiwell
Richard Seiwell Apr 28, 2020 9:01PM ET
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Buying and selling these oil futures as a retail investor(which it seems like many people who do are)is like tossing around a grenade. It may make you some money as you buy low and sell high, but one day sooner than you think youll be stuck holding that sucker with nobody playing catch. Then come the calls to make your physically come get the oil you bought:))
El Cabron
El Cabron Apr 28, 2020 10:53AM ET
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Is the "physical" price referred to in this article just another name for the spot price, or does physical price mean something else?
Barani Krishnan
Barani Krishnan Apr 28, 2020 10:53AM ET
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No, physical is a market all by itself. In fact, it is the REAL market versus the virtual one called futures. People take delivery of physical barrels (not too many of them) of course in that market versus the billions of dollars worth of virtual barrels that just vanish on the futures side, once settlements are squared off. Google and find out more.
El Cabron
El Cabron Apr 28, 2020 10:53AM ET
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Barani Krishnan  Thank you for the reply. Prior to posting here I had indeed Googled physical price vs futures price of WTI, but didn't see the explanation you just gave. I will try again. I presume there must be a site(s) that provide the physical price. Thanks again.
Barani Krishnan
Barani Krishnan Apr 28, 2020 10:53AM ET
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try Plains All American physical crude oil prices
El Cabron
El Cabron Apr 28, 2020 10:53AM ET
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Ollie North
Ollie North Apr 28, 2020 9:48AM ET
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The Russians and the Saudis had to know that delaying cuts until May 1 would yield this result........ I think their plan is still to BK all the shale oil........which is a good thing for everyone.   When oil gets to $ 80 again, the banks can sell the shale assets and that POS biz can maybe start back up - but it would be better for everyone else that it never does.......
be best
be best Apr 28, 2020 9:36AM ET
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to my opinion all markers or trades must balance Highest next Lowest. the is marketing. Otherwise speculations which allows market movement.
Ali Bransford
Ali Bransford Apr 28, 2020 9:25AM ET
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whats crazier is when all this hits the fan and reaches the wider stock market.
James Duke
James Duke Apr 28, 2020 9:21AM ET
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Oil futures will be safe to short for months imo, the biggest producers made their own bed and now have to lie in it. Demand will not go back to pre Covid levels for some time and they acted too little too late with production cuts. I honestly don't see the July contracts being much better unless production gets cut another 200 to 300 percent. They need to trim about 30mbpd more to take care of this supply glut and keep it in place even when demand picks back up some or it's going to be a very long road until futures stabilize even if spot does.
Barani Krishnan
Barani Krishnan Apr 28, 2020 9:21AM ET
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Spot on, James!
Rick Lai
Rick Lai Apr 28, 2020 9:11AM ET
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The description above makes senses, but oftens the outcome is reversal.
Barani Krishnan
Barani Krishnan Apr 28, 2020 9:11AM ET
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For now, a replay of May WTI looks quite certain.
Jerome NY
Jeff_Musk Apr 28, 2020 9:08AM ET
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Every things atmre possible like anyone die before he settle his contract. And it was just an mechanical error by the retail investors who has no physical interest in oil attacked by the hedgefunds like. Does USO really get the oil on maturity?
Kostas Ntinos
KNtrader Apr 28, 2020 9:05AM ET
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Futures have nothing to do with the physical price! The physical price was down to $ 6.55!
Kostas Ntinos
KNtrader Apr 28, 2020 9:05AM ET
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Futures are instruments that can go to 0 and become worthless !
Teh Olympian
Teh Olympian Apr 28, 2020 9:05AM ET
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And physical oil can go negative.
Kostas Ntinos
KNtrader Apr 28, 2020 9:05AM ET
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Teh Olympian  Theoretically yes, you can get paid to buy, but what should you do with the oil?
Charlie Jiang
Charlie Jiang Apr 28, 2020 9:00AM ET
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You just forgot one thing - the East Asia which occupied alomost 60% of the market is coming back to normal life now. And US will be fully opened in three to four weeks. Not talking about the US Strategy Reserve is filling up now.., the chance is 50/50, not like you said sounds like 90/10
Di Di
Di61 Apr 28, 2020 9:00AM ET
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Good luck with “fully opened in three to four weeks”
Green Greta
GreenGreta Apr 28, 2020 8:58AM ET
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I should have only stuck to NG.... More loans on oil as I thought mericans could figure something out and maybe cut enough production... Greedy merican Yankees kept pumping now they reap the rewards. Real Greta pleased. This Greta is freta Greta....Maybe once brims overflowing then almost all is shutdown and NG starts to fly! Then I can make back 20% of losses there then cower away into the abyss.
Arthur Hulme
Arthur Hulme Apr 28, 2020 8:52AM ET
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Businesses starting to reopen... people starting to go back to work
Joao Abo-gaux
Joao Abo-gaux Apr 28, 2020 8:47AM ET
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It will, no doubt about it, unless someone has a place to store it
Barani Krishnan
Barani Krishnan Apr 28, 2020 8:47AM ET
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Yes, the question though is how soon and to what degree?
Mohamed El Saiid
Mohamed El Saiid Apr 28, 2020 8:18AM ET
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You ran to an extremity on predicting negative spot prices
Barani Krishnan
Barani Krishnan Apr 28, 2020 8:18AM ET
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It is what it is, unfortunately.
Jose Emenis
Jose Emenis Apr 28, 2020 8:16AM ET
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Don't worry... Trump says -$100 oil is a hoax just like coronavirus....
Barani Krishnan
Barani Krishnan Apr 28, 2020 8:16AM ET
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Who knows; if we bleach TI, we might a premium :)
Jose Emenis
Jose Emenis Apr 28, 2020 8:16AM ET
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Wee Lim
Wee Lim Apr 28, 2020 8:06AM ET
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perhaps china would love to "ship it in" at minus 100
Barani Krishnan
Barani Krishnan Apr 28, 2020 8:06AM ET
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It's a question of who has the storage now.
Kostas Tsolis
Kostas Tsolis Apr 28, 2020 5:51AM ET
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Totally agree with your assumptions , great view but fears that will be much sooner. Already we saw a drop of 40% in June meaning that all going for July again as no point to trade on June contract. Thinking that I would do the same of course.My question is for how long we will see prices below 8 or 6 $ since the contract will change on 22nd ?? At this point i lost the maths...
Barani Krishnan
Barani Krishnan Apr 28, 2020 5:51AM ET
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I guess after hitting negative, it will probably get to the teens in positive by delivery.
Andrew Clift
Andrew Clift Apr 28, 2020 5:19AM ET
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Assuming oil does go negative, with shale being so important as well as the hardest one to turns the taps off, does that spell biggest trouble for the US oil industry as this stands?
Barani Krishnan
Barani Krishnan Apr 28, 2020 5:19AM ET
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For now, the industry is tottering on its last leg, and there'll be more bankruptcies after Diamond and Whiting for sure. The dust will settle at some point and we will rebuild.
 
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