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Historic price crash in oil takes prices briefly below $0

Rollover woes as May long traders attempt to avoid delivery.

Oil Source: Bloomberg

Oil summary

Long traders on the May contract were in for a harsh squeeze lower yesterday, as the expiry of the contract today meant that they either had to take physical delivery or sell at any price. Sell at any price was the result, and the results took oil prices below $0 (June contract also dropped but remained above $20) in a historic crash for the energy commodity.

OPEC+ cuts go into effect in May, though even that wasn’t expected to aid oil prices significantly due to the fact that the 9.7 million barrels per day (bpd) cut was far less than the expected 30 million bpd drop in demand on a lack of transportation needs in the coronavirus storm.

Storage is filling fast, and higher cost rigs getting idled with last Friday’s Baker Hughes oil rig count already showing a consecutive decline, a theme that will likely persist in the coming weeks should oil prices fail to rise. The US has already signalled they may consider halting Saudi imports of oil and will add a significant amount to US reserves.

WTI technical analysis, overview, strategies and levels

The technical overview remains volatile (to say the least), even if the June contract onwards are more firmly above the $20 mark. Its price already made a move past this week’s first resistance level, and expectations are that even if pivot points manage to hold in the short term and aid contrarian strategies, it’s likelier than not they’ll eventually break in the mid to long term.

In terms of oil data, we’ll get the American Petroleum Institute's (API's) oil inventories estimate tonight expected to show another significant surplus, and could be outdone by the Energy Information Administration's (EIA’s) estimate tomorrow as has been the case over the past few weeks.

It may also force a swift response from OPEC+ producers who may propose larger cuts, but any amount in the short term that falls below the 30 million bpd demand requirements in the absence of lockdown restrictions easing may offer limited upside momentum.

In terms of liquidity on the exchange, expect long traders to be more cautious in terms of initiating later as the June contract approaches expiry, though to the upside higher cost rigs can’t hedge at these levels and hence short-term upside movement can’t be ruled out should oil prices get kicked higher and fail to meet any resistance.

Learn more about oil trading

IG client* and CoT sentiment for WTI

Discover how IG’s spot commodities are priced, and how overnight funding is calculated

In terms of sentiment, this has been the absolute worst case scenario for traders, stuck holding an extreme long bias and where the bulk of those longs were initiated above the $40 level.

Retail bias is lower but still holding extreme long bias at 83%, while last Friday’s Commitment of Traders (CoT) report shows traders holding an extreme long bias at 79% with shorts getting more comfortable entering, but longs prior to the move upping their positioning even more so.

WTI chart with retail and institutional sentiment

The recent crash in the spot price hasn’t affected IG’s oil prices as heavily and hence, its clients, as IG’s oil prices are based on the June contract which has thus far remained above the $20 mark. It has avoided the carnage witnessed in the spot oil market that saw prices go into negative territory thanks to the mayhem of long traders racing to exit the May futures contract before expiry, in an attempt to rollover into June or face massive physical delivery.

Larger speculative traders according to the CoT report have been holding an extreme long bias (at 79% buy bias and reaching 90% at times) when oil prices were well above $40, consistently rolling over to the next contract in hopes that oil prices would recover. They have no doubt been severely tested by the recent stampede and we will update their sentiment once this Friday’s CoT figures are released.

*The percentage of IG client accounts with positions in this market that are currently long or short. Calculated to the nearest 1%, as of today morning 8am.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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