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A rainy honeymoon for OPEC+ as physical despair
overwhelms improvement hopes. A week removed from a
historic supply deal, unprecedented physical distress has wiped out
much of crude's pre-cut price rally. ICE Brent has dipped back
below $30/bbl and WTI prices are under pressure. Global oil demand
is now bottoming out, with our latest estimates pegging April
global liquids demand at roughly 72 MMb/d, 28 MMb/d below April
2019 levels, and the lowest monthly level in at least two decades.
As expected, pain is spreading from refined products to crude
demand as refiners around the world slam the brakes in the face of
fast-worsening margins. Traders, traditional buyers of last resort,
have proved unwilling or unable to absorb the full extent of the
gushing surplus of oil in the market, allowing pressure to build
across forward curves, price differentials and physical benchmarks.
Oil markets have entered the worst of the physical stress
vortex as global inventories build massively; supply has started to
respond in both managed and unmanaged ways, but markets are left to
parse the modalities of the market's forceful rebalancing, with
incoming market data still reflecting acute distress rather than
improvement to come.
Roll tide: WTI front-month collapse on expiry underpins
dire physical conditions. For a brief period every month,
in the last few days of the NYMEX WTI futures trading cycle,
speculative or paper futures positions start rolling over en
masse to second month contracts, and as open interest for
front-month contracts dwindles, markets catch a fleeting glimpse of
the underlying physical market conditions. This is normally a
pretty undramatic affair. But this month's roll over has put the
full extent of the US physical precariousness on display.
On Monday, WTI May 2020 futures prices fell deep into negative
territory.
Now it's important to clarify the unique parameters of the WTI
front month price meltdown in a super-contango. Open interest in
May 2020 WTI contracts has declined dramatically in recent weeks
and stood just above 100,000 contracts on Friday, 20% of the size
of the June 2020 open interest, reflecting that liquidity and vast
majority of any speculative/paper positions had already broadly
shifted further along the curve. The remaining contracts represent
contracts that are set for physical delivery in May (becoming
de facto cash positions). Unlike ICE Brent, the WTI
contract is settled by physical delivery in Cushing at a time of
dwindling spare storage capacity, leaving sellers at the mercy of
extremely congested market conditions on a fast-expiring time
clock.
While the contract roll and liquidity crunch that made the
extreme sell-off possible also mean it is a poor representation of
futures market conditions which are better reflected in June
contracts , the selling frenzy around the settlement does provide a
clear indication that the physical disposition of both Cushing and
the US crude complex is as dire as it has ever been.
Oil markets are now faced with the challenging task of
projecting the severity of short-term distress - still only
partially visible in the data - and demand's uncertain recovery
path against the trajectory of global supply after the OPEC+
agreement and gathering pace of shut-ins around the world.
For global demand, there is finally a glimmer of light at the end
of the tunnel as hospitalization rates decline in New York and
countries such as Germany and New Zealand move towards cautious
re-opening in the coming weeks. But that glimmer is still distant,
with 95% of global gasoline demand still located in countries with
major to full movement restrictions, and inventories building
rapidly. With the OPEC+ cuts already set in motion, the news and
data flow will likely get worse before it gets better.
