Why analysts are concerned about the short-term outlook for oil

Oil prices: the week that was

The current situation in global oil markets is a complex and bewildering one. All up, it’s been a disastrous week for the world’s most important commodity: with WTI plunging into negative territory on Monday and Brent futures also collapsing.

Firstly, although WTI’s May futures Nymex contract finished out last Friday’s session at US$18.27 a barrel, things quickly deteriorated over the next few sessions – with the contract closing out Monday’s session at negative US$37.63 a barrel.

As Pierre Andurand, CIO of Andurand Capital prophetically tweeted before that crash:

‘There is no limit to the downside to prices when inventories and pipelines are full. Negative prices are possible […] oil price is not like an equity price.’

Mind you, even as the WTI contract rolled over from May to June, things continued to fall apart, with the WTI June contract last trading hands at US$10.85 a barrel, down 6.22% for the session.

Brent futures weren’t spared from this carnage either: with the June ICE contract plunging US$2.47, or 12.78% to US$16.86 a barrel, at the time of writing.

Catalysts in focus

Specifically in the case of land-locked WTI, the primary catalyst behind its collapse is centrally focused on concerns around US crude storage capacity. For reference, the WTI Nymex futures contract mandates physical delivery be made to the Cushing, Oklahoma hub. Brent ICE futures contracts, by comparison, have the option to be cash settled.

Yet problematically, the Cushing hub is the ‘fullest’ in the US, currently sitting at 69% working storage capacity, according to the latest figures from the US Energy Information Administration (EIA).

As Ed Moya, a market analyst at OANDA this week wrote, this collapse ‘is mostly a reflection of traders rolling contracts to June as no one wants to take delivery because storage capacity is getting close to being reached.’

Overall, US crude stocks increased by 19.2 million barrels from 3-10 April, representing the largest week-over-week increase in at least two decades, according to JBE Energy.

The EIA is set to release its latest Weekly Petroleum Status Report on 22 April.

Demand, demand, demand

Though those storage problems may be specific to the WTI contract, the entire oil complex remains under intense pressure off the back of unprecedented demand destruction as a result of the Covid-19 pandemic.

News of production cuts from OPEC+, which will see a 9.6 million barrel per day cut across May and June – did little to bring balance to the oil markets, as evidenced by the historic crashes we have seen this week.

OPEC seems well aware of this fact, mind you, with a number of its members, Saudi Arabia included, speculated to be considering immediate production cuts ahead of the above specified May and June cuts, according to the Wall Street Journal.

The outlook for oil prices: WTI futures & Brent futures in focus

For those of the opinion that oil volatility has peaked, a number of market commentators believe that such a view may be overly optimistic at this point.

Ed Moya, for example, argued that we may see similar price issues emerge with the WTI June contract as we did with the May contract.

‘The outlook for WTI crude beyond the summer has Wall Street eyeing the $30 a barrel level, but this expiration trade issue could happen again next month if we see inventories and pipelines near capacity. US shut-ins are growing and that could be the only thing that prevents the most active crude contracts from crashing.’

For reference, the WTI June contract expires on 19 May, 2020.

Importantly, it should be noted that since Mr Moya initially made those comments, many of the WTI contracts of further out delivery months have also fallen significantly in value. At the time of writing, only the June 2021 contract traded above the US$30 a barrel mark.

Elsewhere, former BP Chief executive John Browne recently told the BBC that he expected oil prices to remain low for some time, saying:

‘The prices will be very low and I think they will remain low and very volatile for some considerable time.’ Mr Browne added that, ‘There is still a lot of oil being produced that is going into storage and not being used.’

Looking at Brent ICE futures, while the international benchmark isn’t immune to steep price declines; at the very least, there is ‘no risk of going negative’, noted Reuters, given that the contract can be settled in cash.

How to trade oil markets: long and short

What do you make of the current situation: do you see bullish or bearish opportunities? Whatever your opinion, you can trade WTI spot and futures, as well as Brent spot and futures – long or short – through IG’s easy to use trading platform now.

For example, to buy (long) or sell (short) WTI spot using CFDs, follow these easy steps:

• Create an IG Trading Account or log in to your existing account
• Enter ‘Oil - US Crude’ in the search bar and select it
• Choose your position size
• Click on ‘buy’ or ‘sell’ in the deal ticket
• Confirm the trade