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Oil Crashes Ahead Of May Contract Expiry

By:
Vladimir Zernov
Published: Apr 20, 2020, 15:15 UTC

The near-term hit to oil demand is so huge that traders find it hard to find buyers for oil with delivery in May 2020.

Crude Oil

Oil Video 20.04.20.

Nobody Needs Oil In May

I have previously written about the major spread between oil contracts for May 2020 and June 2020. Today, this spread has increased to absurd levels – contracts for May 2020 traded as low as $11 per barrel, while the low point for June 2020 contracts was above $21.50.

The problem is that nobody wants to take delivery of oil in May. Currently, oil production is unrestricted (the new OPEC+ production cut deal begins in May), while oil demand is experiencing an unprecedented hit.

In this environment, oil storage facilities continue to fill up, and the storage situation in May is set to be very tense.

Currently, the market expects that the new oil production cut deal will improve the supply/demand balance, so the June 2020 contract is trading at levels that are more than $10 higher compared to the May 2020 contract.

Looking at other contracts, traders are expecting that the situation will gradually improve once the OPEC+ deal is implemented and non-OPEC countries cut their oil production as well.

The July 2020 contract is trading above $27, while the December 2020 contract is above $33. Still, there’s so much uncertainty and volatility that it’s hard to take these contracts as indication of what will happen in the future.

Oil May Be Pricing In Slow Recovery Of Activity After The End Of Virus Containment Measures

The OPEC+ deal is impacting the supply part of the oil market balance, but the demand side is also fluid. The recovery in oil demand will depend on the speed at which the world economies will get back to normal life (or some variation of a “new normal”).

Early indications are not too optimistic. All hard-hit countries will likely have to implement a phased approach of the reopening of their economies to avoid the second wave of pandemic.

In addition, consumers will get hit by virus fears and employment uncertainty, which may put additional pressure on economic activity. Currently, it is very hard to forecast the exact impact of the coronavirus pandemic on oil demand in 2020 – potentially, it’s a futile exercise given the number of variables so oil producers will likely have to adjust to the changing landscape on the fly.

Continued uncertainty is no friend of oil prices in the current environment, and that’s why we see June 2020 contract race towards $20 per barrel.

About the Author

Vladimir is an independent trader and analyst with over 10 years of experience in the financial markets. He is a specialist in stocks, futures, Forex, indices, and commodities areas using long-term positional trading and swing trading.

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