An unprecedented collapse of the oil price: a key international oil benchmark – West Texas Intermediate (WTI) – has plunged to less than zero on April 20, 2020 amid the deepest fall in demand in 25 years. The question is: how could this happen and why?
Oil price analysis: what is happening?
The WTI price has been making massive headlines over the past couple of days, as it fell to minus $40 a barrel as a result of a sharp drop in demand because of the coronavirus pandemic. The oil markets’ meltdown is growing as the producers run out of places to store unwanted crude oil reserves. It means they were paying buyers to take oil off their hands.
Drop in demand, oversupply and lack of storage pushes Oil price fall into negative territory
For the first time in history, the West Texas Intermediate crude for May delivery fell below zero on Monday. On Tuesday, April 21, 2020, the massive selling spread to the WTI June contract, which also plunged 42 per cent to $11.79 a barrel.
According to the latest oil price news, volatility continues. The spreading of this crash to futures that are still far from their expiry date, revealed the gravity of the oil market crisis. Storage facilities, including pipelines, tanks and supertankers, are overwhelmed by a huge oversupply, which is caused by a drastic demand shortage.
As the world is locked down to slow the coronavirus spread, flights remain cancelled, people stay at home and parts of the economy, which consume a lot of energy, have been shut down. All these wiped out the world's demand for oil.
Now we have been witnessing a severe imbalance between oversupplied oil, as oil producers continued to pump crude from their wells, and the biggest slump in demand in history.
Let’s take a closer look at the latest oil price forecast and news and see how to trade it with CFDs in a bearish market environment in a short video by Capital.com market strategist David Jones.
Oil price fall: unprecedented, but could it bring profit?
What do the lowest oil prices, or better say negative prices, actually mean? As the oil storage facilities are limited and already full, oil producers are forced to pay buyers to take the unwanted barrels off their hands. Although this has never happened before, it does not mean it couldn't happen again given the state of the market.
Storing today’s oil should deliver a profit. That’s true. If you could store today’s oil and the price of oil remains stable or perhaps goes up towards the end of the year you have a locked-in profit but then you have to pay a massive premium at the moment for storing the oil.
Buyers should consider that storage cost is surpassing financial crisis levels. They would need to factor the cost of transportation and a storage facility where they may need to hold it. If you were thinking about chartering a supertanker for holding your oil, rates have more than doubled from a month ago, which is a massive cost.
Oil market in ‘super contango’ underlines storage fears
You may have heard the expression “contango” or “super contango” in relation to current oil prices. After the US WTI futures slumped on Monday, the spread between the current contract and contracts expiring later is much wider than usual. This is often referred to as contango, where longer-dated futures prices are much higher than the current spot prices or nearest futures contract. This can often signal – as with oil – a lack of demand in the short term and oversupply.
The current May WTI oil price drop of a record 321 per cent to negative $40 per barrel is the market’s all-time low. The June WTI futures contract, expiring on May 19, fell 42 per cent to $11 per barrel. So far, the resulting spread is the largest in history.
According to Michael Lynch, president of Strategic Energy & Economic Research, “The historic contango is a reflection of physical barrels that can’t easily find buyers and are being sold at distressed prices. The implication is that storage might be more full than thought, or that buyers expect it to be very soon.”
Oil price update: is OPEC cut enough?
Going back to the latest oil price news, OPEC and OPEC+ organisation of various oil-producing countries have agreed to cut almost 10 million barrels of oil per day in production by mid-May, but some commentators argue that by mid-May US storage facilities are going to be full anyway.
For that, when the next set of futures contracts expire in May, we may see some very strange movements in the price again depending on the storage system and on the demand side, assuming much of the world could still be locked or only starting to come out of a coronavirus lockdown.
Therefore, analysing the current oil price trend, analysts predict some crazy volatility for a few weeks ahead.
Oil shares are under pressure
The market’s volatility and the unprecedented oil price fall significantly affect the oil stocks, putting them under pressure. For example, the shares of BP have been hit hard in recent months due to the oil “price war” in recent months. Still, it is interesting that they have bounced back over the past couple of weeks.
Same thing is happening with Exxon Mobil in the US. Although the oil giant has been one of the worst-performing large stocks in the S&P 500 index for the past decade, recently we have seen about a 30 per cent bounce back in price. It means that traders particularly interested in shares could take a closer look at the individual oil companies to spot some attractive trading opportunities.
Oil chart analysis
Going back to the current oil price trend analysis, you can have a look at the big support and resistance levels to watch for in Brent crude oil market.
On Monday, April 20, Brent Crude was trading at $26. At the moment of writing (April 22) the price has dropped to $20 and bounced back to $24 in less than a day.
The most immediate major resistance for the June Brent futures is at $29, which is the high from April 16. When it goes to support levels, we have to go a long way back to look for a big support, as the next major low of $16.50 happened in November 2001.
Trade Brent Crude Oil Spot CFD
Bottom line: massive volatility continues
The oil market volatility is in full swing, which is pretty intimidating. Unless you are sitting there and watching it second by second, it can be very risky. The oil price changes so quickly that no one wants to be on the wrong side of the market’s move. Still, there is always an option to sit on your hands and wait for things to calm down.
Are the prices likely to recover soon? Presumably yes. The negative oil drop down relates only to the price for May delivery, which occurs amid the lowest demand and the highest supply levels. A significant oil price recovery could be expected once the demand for transport fuel increases. This may happen after the lockdown is over, but the slow recovery from the Covid-19 pandemic could bring significant trouble for oil producers.
Given that the oil price has already plunged below zero, there should be a point where we do see a recovery coming back in and the price will eventually rebound. Take your time and wait for the trend to reverse to see whether there is some strength in crude oil in 2020.