Where Next As Oil Closes Below Zero For First Time In Trading History

Oil futures crashed below zero for the first time in history as traders facing demand declines caused by the Covid-19 or coronavirus outbreak scrambled to dump the West Texas Intermediate May contract that was set to expire on Tuesday (April 21).   

Having lost much of its value in Asian and European trading, the WTI May contract slid into negative territory stateside to finally settle at -$37.63 per barrel, down $55.90 or over 300%. Earlier in the session, it fell to a low of -$40.32 at one point and broke every record low for oil prices since records began in 1946.

CME Group CME , the holding company of NYMEX – the exchange where WTI futures trade – said the contract would be allowed to price below zero. But the depth and speed of the decline indicates how negative the market sentiment is for front-month contracts, with even OPEC+ oil producers' historic output cut of 9.7 million barrels per day (bpd) being deemed as being too little, too late to rescue the May contract.

Monday's intraday debacle is also indicative of how oversupplied the U.S. oil market has become of late with much of the country in the grip of the coronavirus lockdown and running out of storage space.

Stockpiles at the U.S. storage hub of Cushing, Oklahoma which also serves as a delivery point of the WTI have risen by 40% to nearly 55 million barrels since the end of February, according IHS Markit INFO . The figure suggests the hub, which has a capacity of 76 million barrels based on Energy Information Administration data, is filling up fast.

Yet, despite the market hammering, retail investors continue to pile in to the June oil futures via exchange traded funds (ETFs), with 565 million barrels worth of exposure via such vehicles that hold 60% of June WTI contracts.

That spells trouble with short-sellers' ire now turning to the June WTI contract which traded down 16.10% or $4 at $20.92 per barrel in the face of lackluster demand that some forecasters predict could fall by as much as 30 million bpd over the near-term; nearly three times over the level OPEC+ cuts.

It implies the June WTI contract could well slide below $20 per barrel and lurk in the mid to lower teens range in another dire month for the crude markets. While better fortunes await the oil market contingent upon the global community getting a handle of the coronavirus pandemic, any recovery may well be slow, painful and unlikely to arrive before the fourth quarter of 2020, maybe even the first quarter of 2021.

As of now, six-month forward WTI contracts are trading at double-digit premiums to the June contract with an ever widening contango, i.e. market expectation of future prices being higher than current prices. The contango, already at 2009 highs, could widen with more pain for front-month contracts and much lower storage to stack up the barrels.

All said, forecasts of $40 oil early next year are not off the mark. However, its what happens in the interim that should spook short-term punters especially those with direct or proxy long calls on June WTI.