“On Monday, May WTI futures did what was once thought to be unthinkable – they went negative. This most recent collapse is the direct result of an oversupplied market, dramatic demand destruction as a result of COVID-19, and contract expiration nuances. It marks yet another perfect storm-type scenario that negatively impacts the price of crude oil.

 

To make matters worse, if that’s possible, the May WTI contract expires tomorrow and, like last month when the prompt month expired, we anticipate another price collapse.

The difference between this time and last month is the drop is far more extreme as traders struggle to roll positions forward to the next month’s contract, taking massive losses as a result. Crude is purchased in advance and the current collapse for May is signaling no demand for a lot of barrels in May. Storage is also not an option for many.

Outright negative prices are a sign that well shut-ins are imminent and are actually occurring in many places where prices in the field are in the single-digits or, in the case of some crude oil condensates, are negatively priced.”

– Bernadette Johnson, vice president, strategic advisory group, Enverus

 

Additional detailed market information

  • This collapse is deeper because of physical oversupply of crude, storage filling quickly, and the still-remaining available storage capacity market evaporating.
  • The storage market has evaporated because operational holders are scared of filling, and financial holders were waiting for this blowout.
  • Actual storage capacity will not hit 100%.
  • There is a mismatch globally between where crude storage is physically located and where it is needed.
  • The June WTI contract is the effective price for crude currently and is still sitting at $21 as of now.
  • According to Enverus’ modeling of storage fill, refinery throughput, and pipeline intricacies, the Bakken will be the epicenter of stranded crude. By the end of May, at least 900 Mbbl/d of Bakken crude is likely to be shut in.

 

What does this mean for the future?

The second half the year prices have not changed much today, and more importantly, the market fundamentals did not change today. We may go through a less dramatic version of this in May when June contract expires, but might also see the opposite…a bounce in June contract if quarantine restrictions are lifted. The market is oversupplied today but once quarantines are lifted, the market is anticipating a strong rebound in demand. It’s also important to note that this needed to happen in the short term because of physical limitations to storage, but the longer term reality is higher prices (higher than $50 WTI and likely $60 or higher).