Energy traders fled from the expiring May U.S. oil futures contract in a frenzy on Monday, sending the contract deep into negative territory for the first time in history, as barely any buyers are willing to take delivery of oil barrels because there is no place to put the crude.
Plunging crude prices pulled global equity markets lower and investors moved to the safety of U.S. Treasury securities, pushing yields slightly lower as any risk of near term inflation all but evaporated with the price of spot oil cheaper than free.
BOB YAWGER, DIRECTOR OF FUTURES, MIZUHO, NEW YORK
“It’s a historic day. What it means is there’s no available storage anymore so the price of the commodity is effectively worthless. There’s no place to put it, so you’ve go to flush it basically. They don’t want it. So when it’s minus a dollar, they’ll pay you a dollar to get it out of there. The bottom line problem is that pipe is full and so is storage, which is kind of weird because if you look at the EIA numbers it does not represent maximum capacity at Cushing at this point… It also implies that some folks are trying to get out of the May contract to the best of their ability without a lot of time left… Some of those folks were probably long the May contract and now they’re trying to bail before the expiration. I’ve seen some ugly expirations in my life but this obviously is an all-time record holder.”
JOHN KILDUFF, PARTNER AT HEDGE FUND AGAIN CAPITAL LLC, NEW YORK
“Normally this would be stimulative to the economy around the world. It normally would be good for an extra 2% on the GDP. You’re not seeing the savings because no one is spending on the fuels.”
“But obviously it’s bone crushing for the producers, the rig count is reflective of this and you’re going to see more of that.”
“The June contract is not going to fare any better. There’s no way the inventories clear.”
DAN RUSSO, CHIEF MARKET STRATEGIST, CHAIKIN ANALYTICS, PHILADELPHIA
“Everyone is making a big deal about the precipitous decline in the May contract, but you have to take delivery if you own it. And as we all know, there’s nowhere to store it. The cost of storage drives the front-month contract negative when you factor in the storage cost. However, the fact that the June contract is beginning to roll over as well speaks in my mind to investors’ views of economic growth, or lack thereof.
“Broad-based commodities are telling you that there is no global growth. I look at the ratio of copper to gold because copper is an industrial metal, widely used for different purposes throughout the economy, and gold is a precious metal, widely used as a store of value or a safe-haven asset in times of market uncertainty. If you look at that ratio it’s been in decline since the beginning of 2018. What’s that telling me is that investors at this point, based on what’s happening in the market, do not appear to be pricing in any kind of V-shaped recovery for the global economy.”
“The message from the commodity as well as the bond market, the trajectory out of here is not likely V-shaped. We’ve had a 28% rally in the equity market and you’re not seeing Treasuries sell off aggressively.”
LOUISE DICKSON, OIL MARKETS ANALYST, RYSTAD ENERGY
“Oil futures continue to defy gravity and are now flirting with negative intraday territory. This moment is of course historical and could not better illustrate the price-utopia that the market has been in since March, when the full scale of the oversupply problem started to become evident but the market remained oblivious. Since then traders have sent prices up and down on speculation, hopes, Tweets and wishful thinking. But now reality is sinking in.
“Rystad Energy has long-warned about single-digit WTI prices and even the possibility of going negative, and now that we have reached this threshold, the next logical step will be shut-ins and bankruptcies. If these materialize in the next month, then we can begin discussing optimism in June, but right now, given the likely low compliance of OPEC+ cuts by May 1, the optimism is not yet warranted, and we could see a repeat situation next month.”
HARRY TCHILINGUIRIAN, HEAD OF COMMODITY RESEARCH, BNP PARIBAS
“The collapse started on Friday. What we are witnessing is dwindling volume. While Cushing stocks can be the driver as people transition to June but if that were true, then the contango between May and June and June and July should be around the same. The June to July contango is around $6 a barrel.”
DAVID WINANS, PRINCIPAL, U.S. INVESTMENT GRADE CREDIT RESEARCH, PGIM FIXED INCOME
“Today’s price move feels like oil is passing a kidney stone. A very painful move but it can’t last for long, since producers are switching off wells as we speak.”
“The ‘supply shock’ from the OPEC+ collapse in March was really a mirage, the demand shock from COVID-19 is overwhelming everything. Ultimately, the path for oil prices is going to follow the path of this virus. Until demand shows some sign of life, oil prices will likely remain on life support.”
KEVIN FLANAGAN, HEAD OF FIXED INCOME STRATEGY FOR WISDOMTREE ASSET MANAGEMENT, NEW YORK
“What the energy market is telling you is that demand isn’t coming back any time soon, and there’s a supply glut. Ordinarily you’d be looking at oil as an inflation indicator, but then it turned into an economic-activity indicator. This price decline can be good if it means more people going to the pump, but that requires people getting out.”
“It’s hard to pinpoint where the market is focusing on this. Oil is running toward zero and stocks are down. But the 10-year US Treasury yield is essentially unchanged. So much factors into the note that oil prices don’t seem to be catalyzing any big moves to (Treasury) yields. People usually refer to price declines at the pump as tax cuts, but the Treasury market is saying we’re just going to sit tight.”