(Reuters) - A historic rout in oil markets sent U.S. crude prices plummeting to as much as minus $40 a barrel on Monday as traders rushed to get rid of unwanted stocks with storage capacity already overflowing amid a coronavirus-induced demand collapse.
U.S. West Texas Intermediate (WTI) crude for May delivery CLc1 recouped some losses on Tuesday to be just in positive territory, leaving market participants to assess the wider implications. [O/R]
Here is what analysts expect in terms of market response:
* “We suspect the WTI June future will come under pressure unless there is more immediacy around supply closures. This may come as forced closures or even bankruptcies in the U.S. shale industry.”
* “We would expect OPEC+ members to talk about bringing forward their planned production cuts from the recent supply agreement. The 9.7 million barrels per day (bpd) reduction is scheduled for May 1. Even so, we see it having minimal impact on crude oil prices in coming weeks.”
Standard Chartered Bank
* “We think the collapse at the front of the curve is an early warning of the turbulence to come. It is, in other words, the event that removes doubt that a serious problem is looming, namely the filling of remaining global oil storage capacity.”
* “Although we expect the negative price incident to be relatively short-lived, it could happen again when the June contract nears expiry given that we expect storage to fill to maximum before then.”
* After April 21, the last trading day of the May contract, “the physical reality of a still massively oversupplied oil market will likely exert downward pressure on the June WTI contract.”
* “But with ultimately a finite amount of storage left to fill, production will soon need to fall sizeably to bring the market into balance, finally setting the stage for higher prices once demand gradually recovers.”
Edward Moya, senior market analyst, OANDA
“This will be oil’s last dance for many U.S. producers as the Trump administration’s efforts to save the shale industry will fall short.”
“North America shale-oil producers will be forced to shut-in very soon and most of the smaller players will not be able to survive this low-price and dismal demand environment.”
“Oil price volatility will remain on high and now that single digits were already reached with the June WTI crude contract, there should be no surprises if we see prices turn negative at one point over the next several sessions.”
Konstantinos Venetis, senior economist, TS Lombard
* “Just as policymakers’ response to the economic aftershocks from COVID-19 will not be enough to stave off a global recession, so oil supply reductions will not lead to higher prices unless demand starts to pick up.”
* “U.S. shale producers are fast approaching the point where they will be forced to shut down operations... At some point, these producers will have to weigh the cost of suspending output, which also results in reservoir damage that threatens future output revival, against paying to have the oil taken off their hands, which raises the possibility of negative prices.”
Bjornar Tonhaugen, head of oil markets, Rystad Energy
* “We believe the market will be under continued downwards pressure for the coming weeks as well, as supply shut-ins have not yet occurred to a sufficient extent to balance supply with the low demand.”
*”OPEC+ cuts will only come into effect from May 1 and will remove much less than 9.7 million bpd of the market in May, we believe, due to lack of full compliance for many upstream producers in the agreement.”
*”The market needs to also see additional upstream shut-ins across the globe to the tune of 6-7 million bpd for 2Q 2020, if the demand loss from COVID-19 is around 20 million bpd this quarter.”
* “While the plunge into deeply negative territory and a $60 per barrel difference between May and June was a near 20-sigma event and may not necessarily repeat itself in the June contract — we are not out of the woods by any means.”
* “The risk of hitting tank tops in the key U.S. delivery points such as Cushing remains a key concern and may continue to weigh on prompt prices and keep contangos elevated.”
Sushant Gupta, downstream research director, Wood Mackenzie
* “The historic drop in WTI prices is an indication of the downward pressure which many other crude oil grades could face, given the oversupply situation.”
* “It also provides an opportunity for large consuming nations in Asia such as China and India to expedite filling up their petroleum reserves. The capacity left this time around is much less compared to the 2014/15 crash.”
Howie Lee, economist, OCBC
* “It is not the end of the world, and the negative prices are not reflective of the entire state of the market.”
* “Will this happen again? I will not bet against it. The lack of storage/expensive storage is unlikely to be resolved unless demand either improves, or the U.S. cuts its output.
* “The timeline for the U.S. reopening its economy remains an enigma, although a conservative bet would be from July onwards. At the same time, the U.S. is unwilling to reduce output via centralised planning as that goes against capitalism ideals”.
* “A key question is whether we could see a repeat of this with the June expiry next month. It is likely that storage this time next month will be even more of an issue, given the surplus environment, and so in the absence of a meaningful demand recovery, negative prices could return for June.
* “Another factor which could add further downward pressure to the June contract as we approach its expiry is index rolling. Retail investors have piled into oil ETFs (exchange traded funds) at these lower prices, and so these ETFs hold a larger than usual share of the June contract open interest.”
Stephen Innes, chief market strategist, AxiCorp
* “It’s far too early to call this a trade gone wrong with reopening happening around the world amid the increased likelihood of additional short term interventions from the G-20 and OPEC+ producers.”
* “But this meltdown brought to bear a level of hedging unsophistication that more resembled pen and paper 1980s trading rather than the computer-modeled era of 2020.”
Reporting by Arpan Varghese and Swati Verma in Bengaluru; editing by Richard Pullin and Dan Grebler
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