Oil Price Fundamental Daily Forecast – Production Needs to Be Cut More Swiftly
U.S. West Texas Intermediate and international-benchmark Brent crude oil futures continued to plunge on Tuesday, with the expiring nearby May contract returning to negative prices for a second session after falling below zero for the first time in history the previous session. With the May futures contract trading in negative territory, traders have to effectively pay to get oil taken off their hands.
While most of the country remains on lockdown thanks to coronavirus, demand is expected to drop, which is driving up supply. Higher supply means storage tanks are filled, so there is nowhere to store oil for future use. Anyone taking delivery for oil at the current bargain basement prices has to be able to put it to immediate use.
“Even as OPEC++ oil production cuts are set to kick in May 1, and supply and inventories should tighten significantly in 2H’20, the next 4-6 weeks are seeing severe storage distress, likely to drive wild price realizations and unusual disconnects, including supercontango and negative prices,” Citi analysts led by Eric Lee wrote in a note to clients Monday.
More Trouble Ahead for Middle East Markets
Gulf debt and equity markets fell on Tuesday and the Saudi currency dropped in the forward market, after the collapse in U.S. crude oil futures to below $0.
Here is the problem that could spread across the global markets. The cost of insuring against a potential debt default by Saudi Arabia – the world’s biggest oil exporter – increased slightly, to 168 basis points from 166 on Monday, according to data from HIS Markit. It is up 13 bps in the past week.
Lower oil prices, combined with other economic pressures caused by the coronavirus outbreak, are hurting the budgets of Gulf countries that rely heavily on crude exports and have strained their currencies.
“Despite the OPEC deal to cut over 10% of global oil production, the price of oil keeps falling. While yesterday’s negative WTI futures price might have been a one-off glitch, it does confirm there is trouble ahead,” said Artur Baluszynski, head of research at investment management firm Henderson Rowe.
The production cuts are coming, but they won’t start until May 1. Furthermore, it is going to take months before those cuts fall enough to come in-line with reduced demand – even if world economies rebound somewhat as people recover from the pandemic.
Unless production is cut more swiftly, next month could see a repeat of Monday’s frenzied activity with the June contract, which settled at $20.43, or $58 more than the impaired May contract.