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Oil Plunges Again Following Historic Downside Move On Monday

By:
Vladimir Zernov
Published: Apr 21, 2020, 15:16 UTC

Oil downside continues as traders are worried that the U.S. will run out of oil storage in May.

Crude Oil

Oil Video 21.04.20.

Unprecedented Downside Move Deals Damage To Investor Confidence

WTI June 2020 contract is down about 25% today after May 2020 contract went deep into the negative territory on Monday as traders tried to avoid taking delivery of oil in May.

This unprecedented move put heavy pressure on oil market sentiment so contracts for other months are also losing ground. For example, the December 2020 contract trades just above $30, which signals that oil traders expect that low oil prices will stay for the full 2020.

While the negative prices for May 2020 contract could be viewed as a historic curiosity, they have certainly dealt real damage to investor sentiment. Also, the market price action on Monday highlighted the real problem of the oil market – some parts of the world may run out of storage in May.

Interestingly, the U.S. is not the only major producer which faces the storage problem. Russia also lacks oil storage space and faces difficulties due to the unprecedented decline of demand for its oil. Not surprisingly, the thinly-traded Urals futures also went below zero on Monday.

At this point, the range of demand estimates is so big that it is clear that no one knows how much damage to oil demand was dealt by the coronavirus crisis. This uncertainty leads to additional downside in the oil market since traders start evaluating the scenario in which the whole world runs out of oil storage.

Is Any Help Coming?

While the recent OPEC+ oil production cut deal is a sign of producers’ readiness to engage in coordinated action to improve the supply/demand balance, it looks like the current situation may lead to additional friction between major players.

For example, the U.S. considers an option to stop Saudi Arabian oil vessels from offloading oil in order to support the local oil industry. In case such restrictions are implemented, the oil glut will worsen since uneconomic production will be artificially kept afloat and won’t leave the market.

Meanwhile, major oil producers understand the severity of the current crisis and are ready to start implementing production cuts before the official start of the deal on May 1.

However, it remains to be seen whether the production cuts will be in time to provide support for the battered oil market and ease the situation on the oil storage front.

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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