Introduction: On April 20, local time, demand in the crude oil market collapsed and the May WTI crude oil futures contract was about to expire. U.S. crude oil plunged more than 300%, falling negative for the first time in history.
As U.S. oil producers run out of domestic oil storage space, The WTI May crude oil futures contract, scheduled to begin physical delivery on April 21, suddenly had “nowhere to place” and encountered the craziest sell-off in the history of crude oil futures.
The price of WTI crude oil futures for May delivery plunged about 300%, closing at -$37.63 per barrel, the first time in history that it fell Entering negative territory, the intraday low was -$40.32 per barrel. The price of London Brent crude oil futures for June delivery fell by US$2.51 to close at US$25.57 per barrel, a decrease of 8.94%.
(WTI crude oil fell more than 320% intraday)
Affected by this, the three major U.S. stock indexes It ended lower, with the Dow Jones Industrial Average falling nearly 600 points. As of the close, the Dow Jones Industrial Average fell 2.44% to 23,650.44 points; the Nasdaq Composite Index fell 1.03% to 8,560.73 points; the S&P 500 Index fell 1.79% to 2,823.16 points.
Canadian crude oil is “paid for free”! Trader: Unbelievable
Canadian crude oil even experienced “negative oil prices”, with the price per barrel falling to minus $0.01. You have to pay a premium to sell a barrel of oil.
Traders on Wall Street also expressed shock at the plunge in oil prices during Monday morning trading.
Senior investment strategist Peter Buchvall told the media that the changes in the oil market are unbelievable because the world’s oil storage space will be exhausted, but he believes , the current price may have reached the bottom, and when the partial economy reopens in May and mid-June, it will bring support to oil prices.
Trump: A great time to buy the dip
U.S. President Trump Pu said the drop in oil prices will be very short-term; negative oil prices reflect financial market conditions, not oil market conditions. Now is a great time to buy crude oil, and hopefully Congress will support it. The inclusion of up to 75 million barrels of oil in the strategic petroleum reserve is being studied; opinions on stopping the import of Saudi oil will be considered.
Two major factors led to the collapse of oil prices
Analysts believe that this time The plunge in U.S. oil prices is mainly related to two factors.
The May WTI crude oil futures contract is about to expire
Oil prices appear A negative value means the cost of transporting the oil to a refinery or storage has exceeded the value of the oil itself. The analysis pointed out that the sharp decline in front-month contract prices reflects that traders are scrambling to exit long positions that require them to make physical delivery amid shrinking inventory space. Furthermore, it reflects convergence with oil spot prices.
Daniel Hynes, senior commodity strategist at ANZ, said front-month contracts usually converge with spot prices as they approach expiration. However, Hynes noted that spot prices are currently “particularly weak.” “In a normal market, the spread between spot prices and front-month contract futures may only be around 40 to 50 cents per barrel, but it is now as high as $8 to $10 per barrel.”
Hynes added, “Traders in the market mostly just want to trade these notes, so they will roll them into the next futures contract. That means selling the May contract and buying the June contract.”
But Hynes also pointed out that “some traders do physical transactions for customers, so they hold the contract until expiration and deliver the crude.”
KKM Financial analyst Jeff Kilburg pointed out that the spread between the May and June contracts – that is, the front-month contract and the late-month contract – is currently the largest in history. “This phenomenon is due to the expiration of front-month contracts and the historic plunge in crude oil prices.”
Global demand collapses
Global crude oil storage capacity is close to capacity, and there is not much storage space in either land-based storage facilities or floating facilities. In its closely watched monthly report, the International Energy Agency warned that daily oil demand in April could fall by 29 million barrels from a year earlier, the largest decline since 1995.
The coronavirus pandemic has dealt a severe blow to global economic activity and dented oil demand. Although OPEC and its oil-producing allies reached a historic agreement earlier this month to cut production by 9.7 million barrels per day starting on May 1, many analysts believe this is still not enough to offset falling demand.
In addition, due to the “contango” structure of the U.S. futures market, the price of the next month’s delivery contract is higher than the price of the previous month’s delivery contract, causing traders to rush to lease floating or Onshore storage to sell crude oil at a profit when prices rebound.
Again Capital analyst John Kilduff attributed the collapse of the May crude oil futures contract to the fact thatIt is estimated that the growth rate of developed economies this year will be -6.1% and will recover to 4.5% in 2021; the economic growth rate of emerging market and developing economies in 2020 will be -1%.
The organization also significantly reduced its forecast for world average oil prices in 2020 and 2021. The forecast for the average price of oil in 2020 has dropped by $22.42 to $35.61 per barrel compared to January. The average price of a barrel of oil is now expected to reach $37.87 in 2021, $20.16 lower than the previous forecast.
OPEC, the Organization of the Petroleum Exporting Countries, predicts that global crude oil demand will fall by 6.9 million barrels per day in 2020, and crude oil demand is expected to fall to the lowest level in 30 years.
On the supply side, although OPEC announced on April 12 that OPEC and non-OPEC oil-producing countries reached an oil production reduction agreement that day, they will reduce average daily production by 970 yuan from May 1. million barrels, and the first round of production cuts lasts for two months. According to the agreement, the scale of production reduction from May to June this year will be 9.7 million barrels per day, from July to the end of the year, the scale of production reduction will be reduced to 7.7 million barrels per day, and from January 2021 to April 2022, the scale of production reduction will be reduced to 7.7 million barrels per day. 5.8 million barrels.
Before the agreement came into effect, major oil-producing countries were still increasing crude oil production. According to data released by OPEC, crude oil production increased by 821,000 barrels per day in March to 28.61 million barrels per day.
The United States, a major oil-producing country, is also less willing to reduce production. The Trump administration is considering offering subsidies to U.S. oil producers in exchange for temporarily not drilling for oil, in hopes of easing an oversupply of crude oil that has sent its price tumbling and bankrupted some drillers. The U.S. Department of Energy has also drafted a plan to compensate related companies. However, the domestic production cuts in the United States have not been responded to by most oil companies. Some shale oil company executives said that no matter what actions the authorities take, the serious oversupply problem will not be solved in the short term, three months after the epidemic caused global oil demand to shrink. The American Petroleum Institute (API) also opposes any interference in free trade in oil. “It’s really the last thing we need to do,” said Frank Macchiarola, the organization’s senior vice president. “Relying on foreign or imported crude oil is important for refineries.”
Perhaps the day when oil-producing countries really make up their minds to significantly reduce production, international oil prices will be able to recover.
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