Why oil market volatility may intensify on Monday and Tuesday

We examine the current factors driving oil market volatility.

WTI and Brent oil prices in focus

Though Brent futures rose 26 cents, or 0.93% on Friday, to finish out the week at US$28.08 a barrel; WTI futures closed out the week at an 18-year low – plunging as much as 13.4% – as concerns over US crude storage capacity mount and the WTI May contract moves to expire.

WTI’s May Nymex contract finished out Friday’s session down US$1.60, or 8.05% to US$18.27 a barrel. For reference, just three months ago oil futures were trading north of US$60 a barrel.

Storage, demand and contango

While the coronavirus pandemic may have kickstarted a collapse in oil demand, it was OPEC+’s inability to come to a production cut agreement – and the ensuing oil price war between Saudi Arabia and Russia – that exacerbated issues.

Mind you, this oil price war turned out to be short-lived, with the Organization of the Petroleum Exporting Countries (OPEC) last week agreeing to a supply cut of 9.7 million barrels per day between May and June. Even so, this move looks to have done little to stabilise already battered oil markets.

Overall, OPEC is now expecting demand to hit further historic lows in 2020, with the organisation last week saying:

‘For 2020, the world oil demand growth forecast is revised lower by 6.9 mb/d, to a historical drop of around 6.8 mb/d. The contraction in the 2Q of this year is expected to be around 12 mb/d, with April witnessing the worst contraction at about 20 mb/d.’

Maybe most interestingly, the current environment has led to a ‘super contango,’ according to OPEC.

‘The term structure of all three crude benchmarks – ICE Brent, NYMEX WTI and DME Oman – moved to a super contango in March, and money managers cut speculative net long positions,’ OPEC said in their most recent monthly report.

In the most basic of terms, contango occurs when futures prices trade higher than the spot prices of the underlying commodity.

Speaking to MarketWatch – Michael Lynch, president of Strategic Energy & Economic Research – commented that this situation is ultimately ‘a reflection of physical barrels that can’t easily find buyers and are being sold at distressed prices.’

Mr Lynch finished by saying:

‘The implication is that storage might be more full than thought, or that buyers expect it to be very soon.’

On that last point, concerns over US crude storage capacity has been another key talking point in commodity markets.

For example, US storage at the Rocky Mountain and Cushing, Oklahoma delivery hubs have risen significantly in the last month. According to the US Energy Information Administration (EIA), the Cushing, Oklahoma delivery hub is currently at 69% working storage capacity (up from 49% just one month ago); while the Rocky Mountain delivery hub is currently at 60% working storage capacity (up from 49% one month ago).

Overall, US storage is now 57% full, up from 50% four weeks ago.

Why volatility may persist

For those hoping that the volatility in oil markets would ease off over the coming sessions – Jim Ritterbusch, president of Ritterbusch and Associates – last week suggested that such an outcome would be unlikely. Here Mr Ritterbusch said:

‘This morning's [Friday, 17 April] major disconnect between May WTI and the rest of the energy complex could become even more pronounced during the next three sessions before the May contract goes off the board.’

The May WTI contract is set to expire next Tuesday, 21 April.

Looking ahead, WTI’s June Nymex contract last traded at US$25.03 a barrel, while the December contract traded at US$33.95 a barrel.

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