Oil Under Pressure: Overshoots, Implodes, Catches Fire

Oil Overshoots

Here we are:

May WTI crude contracts (that expire today) crashed into negative territory for the first time ever on Monday, with markets awash in so much crude that storage space is becoming harder to find. Demand is down 30% worldwide amid travel restrictions and lockdowns to contain the spread of the coronavirus, while output cuts from the world’s largest producers came too late to the show. Hopes that things would fare better today have now been dashed, with WTI contracts for June tumbling as much as 42% overnight to $11.89/bbl

Let’s Play Catch Up:

The Oil Price Crash in One Word: ‘Inelasticity’

• The last year that oil averaged less than $10 a barrel was … 1974.
• ‘Violent rebalancing’ in U.S. production coming, says Goldman

“Some might consider an event that happens 0.25% of the time to be too improbable to worry about,” Love wrote. “However, ask yourself this: How well will you sleep tonight if you know that once every year or two someone is going to wake you up by dropping a tarantula on your face?”

John Love, chief executive officer of United States Commodity Funds LLC, which manages the United States Oil Fund, wrote a piece for the company’s website this spring warning investors to be prepared for the days when prices go kerflooey—even though they happen rarely.

Oil Plunges Below Zero for First Time in Unprecedented Wipeout

• U.S. crude trades at lowest level in data going back to 1946
•  Crude in U.S. trades more than $40 below zero at lowest level

“There is little to prevent the physical market from the further acute downside path over the near term,” said Michael Tran, managing director of global energy strategy at RBC Capital Markets. “Refiners are rejecting barrels at a historic pace and with U.S. storage levels sprinting to the brim, market forces will inflict further pain until either we hit rock bottom, or COVID clears, whichever comes first, but it looks like the former.”

Markets Can’t Ignore an Event This Extreme

• Negative oil prices are more evidence of a broken global financial order

The evidence multiplies that the post-Bretton Woods order, anchored by oil and by independent central banks, is over and needs to be replaced:

Oil Imploded

May $WTI $crude futures in one chart:

To translate this chart: There were no buyers of the front month May futures contract and no storage to roll into as it is full or leased. CL for May sold/traded at NEGATIVE $43 dollars Monday, so, if you had room to store 10,000 bbls of oil they’d have paid you $430,000 to take it.

CME waited until the day before expiration to let clients know prices would be allowed to trade negative.

Institutional Firms will blow out on this:

Retail Traders will blow up on this:

According to @robintrack,  users holding the USO fund had exploded just before Oil’s collapse

Countries may blow up on this…

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Opportunities

So in the near-term: Tankers

Not surprisingly, tankers are getting bid up as their profits explode from the high cost of carry:

Oil&Gas Company Stocks Did Not Collapse With Oil, Why?

Because forward prices are much higher. As @ResearchQf pointed out Monday:

• November CL price was only down $0.56 to 32.67 Monday, so contango WAS a record $29.
• $WTI crude Nov futures reached $15.03 premium over May as prices hit new 20Y lows today. The 2008 low in WTI was on 12/19/08 when 6M contango was $17.28.
• Peak contango of $19.4 occurred on 1/15/09 at a slightly higher price. Contango as % of current price is much higher today. Crude more than doubled within a year in 2009.
• $XLE $SPX ratio down 37% YTD. With possible bottoming of crude near term and hints of factor reversions, relative risk/reward for energy appears highly skewed.
• HF exposure to tech is near historic highs, especially in semis and 50-100x (or infinite) P/E growth software, some of which are now trading at all-time highs (!).
• PC strength due to WFH likely peaks in Q2 and pulls in demand from 2H. Data center spend has been strong for several quarters but always have very short cycles to digest investments.
• Finally, CIO surveys uniformly indicate lower spending intentions, even in higher growth areas.
• Possibly the most hated vs. the most loved groups, but there are fundamental reasons to believe the very stretched rubber band may need to snap back somewhat.

Big Currency Risks

You know I’m a US Dollar bull and have been looking for the trigger to a USD spike. I think we found it.

The USD is backed, not implicitly by gold but by Oil prices. An Oil Price Crash implies risk for the US dollar and all those currencies tied to it. The knock-on effects from worldwide demand destruction of Oil will cause GLOBAL margin calls from imploding Oil. And with that, Oil prices collapsing could trigger the GLOBAL liquidity shortage of USD 

• $USDHKD
• $USDJPY
• $EURUSD
• …
• …
• …

It’s already starting…

And by the way, this is not bullish Gold if places like Russia have to sell their Gold to shore up their currency…

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Oil Catches Fire

I really wanted Oil to base at $17~.  Oil is uninvestable at $10 as I wrote for clients:  Timing The Next Oil Trade.

“No one wants to give us capital because we have all destroyed capital and created economic waste.”

Scott Sheffield, of Pioneer Natural Resources, to the Railroad Commission of Texas

And here’s why in a nutshell:

WARNING: Once storage full, oil is worthless. Can’t consume it. Can’t store it. Negative prices force producers to leave it in the ground. Need demand ABOVE supply for inventories to draw, prices to recover. Until then NEGATIVE CARRY oil ETF creates PERMANENT LOSS of CAPITAL…

@ParrillaDiego

Let me say this as clearly as I can: This Oil drop to 18-year lows on global demand crunch and storage woes is not bullish…

This Is the stuff of Depression. The market just doesn’t know it yet. Samantha LaDuc

What Saves Oil?

The rest of the crude curve is getting sold off today. Below is the June contract that dropped from $22 to an $11-handle overnight and is now $16. (May still negative at $-7.) The price is under $30 all the way to Dec-20. So how can the oil industry survive with these prices? As long as US gas consumption is half its January levels (from ~11m/d to >6m/d), the only thing that will save the industry is demand – not OPEC cuts, not tariffs (Trump is threatening this morning) and not US Government buying a mere 75 m/b for the SPR.

The ONLY thing that can save Oil prices and the Oil industry and all that is associated with it is WORLDWIDE demand.