To understand Monday’s $55.90 drop of the May futures price to -$37.63 per barrel. At no time in the past did oil ever trade in negative territory.
To understand this unique situation, it is necessary to focus on the nature of the NYMEX contract. The contract is for a 1,000 barrels of crude to be delivered to Cushing, Oklahoma over the course of the contract month. In this case, we are talking about May. While the exact day of the month may very a little the last day of trading is on or before the 22nd of the month previous to the contract month. In this case it is the 21st. There are probably few contracts left to trade tomorrow. If bought on margin which is $7,500 ($7.50 per barrel), with Monday’s drop in crude many could not cover their margins and their contracts were sold by the brokerage firms.
Most traders who have purchased a futures contract sell it before the last day of trading. As of last Friday there were still 109,593 outstanding WTI May contracts. This represented about 110 million barrels of crude oil.
Since the crude must be delivered to Cushing, the availability of storage there is critical. Cushing’s total working capacity is 76.093 million barrels and as of the 10th there was 54.965 million barrels leaving 21.128 million barrels of spare capacity. Which is about a fifth of the volume represented by the May contracts outstanding on Friday.
The week of the 10th, 5.724 million barrels was added to storage at Cushing. At that rate Cushing will be full May 8th. There is clearly not enough storage at Cushing to take the physical delivery of the 110 million barrels represented by Friday’s outstanding May contracts. The problem is compounded because most, if not all of the remaining storage, is already under contract.
With crude in an extreme contango the only companies that could take advantage were those that have spare storage capacity at Cushing either because they own the tanks or more likely that they have already leased that capacity.
It is apparent to the market that the lack of additional storage capacity will persist through June and July. As of this writing June contracts are down $9.99 at $11.03 per barrel and July is off $6.74 at $20.23. The May contract is actually back in positive territory at $8.23 on its last day of trading.
We are awash in crude oil and gasoline and jet fuel as well. Refiners are shutting down and we will gain more insight into that tomorrow with the EIA’s weekly data release.
After a discussion with one of our subscribers, I came to the obvious conclusion that one of the big pieces of data to watch is gasoline consumption which is the obvious short term leading indicator of GDP as it is an indicator of how many people have returned to work.
The Texas Railroad commission could have added support to the market and stabilized some of the disparities created by the excess inventories. Instead it delayed making a decision. If the June outlook of $11.03 per barrel holds it is barely enough to cover the lifting cost of oil production for most of the producers with no money left over for administration cost.
For your author it is a flashback to Midland in 1986-1988 where the only demand for forecasts came from attorneys for Chapter 11 reorganizations in bankruptcy courts. Producers will not be the only folks in bankruptcy courts as owners of office buildings and apartment complexes will find themselves in dire straights as the oil companies and service companies shed employees. The big concern is whether they will be able to lure their employees back after the layoffs.
Oil won’t recover until people return to work. Even then the recovery will be slow as rebooting the economy will not be instantaneous. Furthermore, some employers may find that some of their workers are more effective working from home. That means fewer commuters. It will be several years before gasoline consumption returns to near 10 million b/d.