Oil Price Fundamental Daily Forecast – Weaker on Oversupply, Storage Capacity Fears

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Monday, giving back some of its gains from a two-day short-covering rally. The catalysts behind the selling pressure are renewed concerns that production cuts will not come fast enough to fully offset the collapse in demand from the coronavirus pandemic.

At 07:40 GMT, June WTI crude oil is trading $14.62, down $2.32 or -13.70%. June Brent crude oil is at $20.33, down $1.11 or -5.18%.

Oil futures posted their third straight week of losses last week and have fallen for eight of the past nine, with Brent down 24% and WTI off around 7%.

Storage Nearing Record High

The biggest fear for U.S. oil traders is that storage at Cushing, Oklahoma, could reach full capacity soon. Creating this worry is last week’s U.S. Energy Information Administration (EIA) weekly inventories report for the week-ending April 17, which showed supply at 518.6 million barrels, near an all-time record of 535 million barrels set in 2017.

Cushing, Oklahoma, the delivery point for WTI futures, was 70% full as of mid-April, although traders said all available space was already leased.

US Producers Need to Cut Faster

The price action suggests traders are concerned that U.S. producers may not be slashing output quickly or deeply enough to buoy prices, especially when global economic output is expected to contract by 2% this year, worse than during the Great Recession over 10-years ago, while demand has collapsed 30% due to the pandemic.

While OPEC and its allies are set to begin aggressive cuts on May 1, U.S. producers have also made moves of their own, only slower than their counterparts.

Amid the rush to cut output, rig counts in the United States are down to the lowest since July 2016, while the total number of oil and gas rigs in Canada has fallen to the lowest since at least 2000, according to Baker Hughes data.

“The Permian Basin and New Mexico accounted for 62% of the shutdowns; an ominous sign considering this region has been one of the more prosperous in the U.S.,” ANZ analysts said.

Daily Forecast

Traders don’t want to get caught on the wrong side of the market, nor do they want to miss out on a crash like we saw last week so they are likely to continue to sell rallies as long as the fundamentals remain bearish.

Retail investors were caught off guard last week when the May WTI contract plunged into negative territory for the first time ever two days before expiration as financial traders scrambled to avoid having to take delivery of oil.

That plunge may be sending traders into the deferred futures contracts in order to avoid getting trapped in a market trading below zero.

“Anybody who has had length who doesn’t have storage contracts has either closed their positions (in June) or rolled far forward … because it’s suicide to carry a position into the close after seeing what happened last month,” said Tony Nunan, a senior risk manager at Mitsubishi Corp. in Tokyo.