U.S. crude’s unprecedented rout on Monday was a harbinger for prices that will likely continue to “fall off a cliff” as the coronavirus suppresses global demand — and suggests that some big investors and oil producers may be in financial jeopardy, according to analysts.
The May contract for U.S. West Texas intermediate crude oil (CL=F), which expires on Tuesday, erased its entire value — plunged below zero for the first time in history before settling at -$37.63 per barrel.
The June contract for the commodity (CLM20.NYM) also sank sharply, but held above $15 per barrel Tuesday morning.
Crude is now caught in the crosshairs of ample supply and the demand shock of the COVID-19 crisis. Weak demand has kept oil storages filled to the brim with crude, which are unlikely to be depleted in a global economy frozen in place by restrictive lockdowns keeping businesses shuttered and citizens at home.
Indeed, U.S. crude inventories have been steadily rising in recent weeks, and are currently hovering near 504 million barrels, a level that’s 6% above the five-year average for this time of year, according to the latest Energy Information Administration data.
“There’s a tremendous amount of demand destruction, keeping in mind that we are essentially in a depression right now with tens of millions of people unemployed in this country,” long time oil market analyst Stephen Schork, Editor of The Schork Report, told Yahoo Finance on Monday.
Speculating that “someone big in this market is blowing up, either a hedge fund or a major corporation,” Schork added that the economy’s fundamentals bode poorly for any sort of lasting recovery.
“We are producing too much oil, we’re not consuming too much oil and we are going to run out of places to store that oil sooner rather than later,” the analyst told Yahoo Finance.
When the new front-month contract begins trading on Wednesday “the table is still set for continued weakness…and I’m expecting that contract to fall off a cliff just like the May contract did.”
‘Hope is not a trading plan’
Despite an ostensible truce between Saudi Arabia and Russia that was brokered by the U.S. and meant to end a price war, crude has remained lodged in a deep bear market. Monday’s move —which was something Goldman predicted in a bleak research note late last month — was the latest measure of how deeply the coronavirus pandemic has upended the global economy.
The “one-two” punch of COVID-19 crisis and the Saudi-Russia market brawl created a downdraft for crude that is endangering U.S. energy producers, noted Stewart Glickman, CFRA Research’s energy equity analyst.
With prices well below breakeven levels, “we have already seen one small-cap name, Whiting Petroleum announce a Chapter 11 bankruptcy protection filing, and we think more will be on the way,” Glickman added.
Rising crude inventories touched off jokes among a few veteran market analysts who openly mused about storing crude in their homes, in the hopes of waiting out the current drop.
God oh god…I wish I had a spot to store some crude. Wife won’t let me empty swimming pool. Folks shrugging off May contract behavior…but will attack June next. Gonna be a funky, funky next few months. Wonder if it’ll influence TXRRC decision on pro-ration…coming tomorrow
— Dan Pickering (@pickeringenergy) April 20, 2020
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“If we could store in our backyards, we would probably do it and wait for oil to revert back up to $30, $40 a barrel and, you know, all be real happy about that,” Scott Bauer, Prosper Trading Academy CEO, told Yahoo Finance.
“But that’s not happening, and that’s not what is going on in the U.S. patch here,” he added. “You know, it’s just complete, complete utter chaos between the demand destruction and nowhere to put the existing supply that we have.”
Shrinking worldwide demand is hammering energy prices, which would normally be stimulative for consumers, but are now indicative of a deep downturn that some analysts describe as a depression.
Schork pointed out that with millions out of work and others working from home, there’s simply not enough commuters to justify higher prices.
“This summer, demand is over before it even began. This season is dead on arrival,” the analyst said, dismissing people hoping for a resurgence.
“They’re hoping prices are going to move higher, and hope is not a trading plan,” Schork added. “There’s nothing to hope about here, we’re in a long-term structural bear market for oil here.”
Javier David is an editor for Yahoo Finance. Follow him on Twitter: @TeflonGeek