Yesterdays epic negative oil prices were due to the fact the CL1! Futures expiration was 21.04.2020, therefore all unsettled contracts had to undergo a physical delivery in the Oklahoma Terminal. The problem however is that the storage is 70% full already and any level above 80% is considered dangerous from the technical point of view.
There is nothing unnatural in the current situation, although the depth of the fall is indeed unprecedented. The spot and the nearest futures prices are suppressed due to massive oversupply. If you take a look at the November 2020 prices, a healthy 32 USD per barrel is printed.
What is of particular interest is that while WTI spot is negative, Brent and Urals oil benchmarks are trading at the reasonable levels, having lost just about 6%. The differential shows us that the oil market is fragmented and is not entirely global. There are hundreds of types and brands of crude oil of varying chemical composition and different quality, and the refineries are customized to deal with a particular type of oil.
While the Saudis are offering 3 month payment free oil shipments to Europe, there is a technical and infrastructural constraints on the volumes of oil that Europe can take from the unusual source.
The fed had confirmed that they will be buying junk grade corporate bonds, but they are targeting to help those who are solvent but illiquid. To quote the fed official: the fed wants the price discovery process to continue.
Given the current oil price combined with the levels of indebtedness of the shell oil producers, we will see bankruptcies as their objective long term insolvency won’t let the fed take on the risk and save them.
On a practical note: USO etf, which is a holder of near term oil futures, seems to be a decent option to go long on oil as there is only one way for oil to move now.
Shell oil producers are too risky at these price levels. Yet, as the time goes and investors flee from the default risks, and the near default stocks start trading for pennies, one might start picking those stocks.
Buy 20 of them. 15 go bankrupt. 5 left survive narrowly and get a x500 upside. One good trade.
What do you think guys? Are you among those who burned themselves badly trying to catch the falling knife of the spot oil today? Or were you the lucky shorter who will be buying a Bentley tomorrow?
Tell me in the comments.
So it was not the general oversupply but the local oversupply due to the technical settlement rules.