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The fall of the West Texas crude oil below zero opened a new reality for investors in the black gold market. Sellers are willing to pay extra to buyers so that they pick up barrels from them. There is so much oil that there is nowhere to store it. If at the end of March there were 109 million barrels of sea tankers, by April 17 the figure had already increased to 141 million. Reserves in Cushing, the key US storage and delivery point of WTI, jumped 48% since the end of February, to almost 55 million barrels. Its capacity as estimated by the US Energy Information Administration is at 76 million. It is then expected that there will be no storage left in early May.
The output of American manufacturers on record production with the advent of coronavirus turned into a real disaster for them. The break-even point, as estimated by Financial Times experts, is at $ 30 per barrel and as soon as it was passed, oilmen from the United States began to actively hedge risks through the sale of futures contracts. Losses in the physical asset market should have been compensated by income on the derivatives. But who could predict that the WTI would fall below zero? In this kind of situation, no hedging technology would be able to help. The risks of defaults and bankruptcies have soared rapidly.
WTI crash below zero:
In my opinion, it will not be possible to stabilize the market without further reductions in production. And the States must take an active part in this. Prior to the April meeting of OPEC +, the US president said that antitrust laws prohibit Washington from participating in a deal with Moscow and Riyadh, then claimed that no one had asked for it, and finally announced that the decline in American production will happen automatically . He was right, but at what cost? The number of drilling rigs from Baker Hughes in the week until April 17 fell at the fastest pace since 2015, the figure fell by a third since mid-March, and a decline in production will necessarily follow its peak.
The magnitude of the reduction in global oil demand due to coronavirus is estimated at 30-35 million bps, OPEC + closed the hole by only a third, signing an agreement to reduce production by 9.7 million bps. The participation of the United States, Canada, Brazil, and Mexico in the agreement is unfounded, the market needs specific figures, and I have a hunch that it will appear soon. The states need a strong hand from the block, the owner of which recognizes that without joint efforts with Russia and Saudi Arabia it is impossible to save the oil market.
Technically, on the Brent daily chart, after updating the March lows, the red pattern AB = CD was activated. Its target of 161.8% indicates that the North Sea variety is quite capable of sagging to around $ 15 per barrel. At the same time, from a fundamental perspective, the medium- and long-term prospects for oil look moderately optimistic: a further reduction in production, a way out of social isolation and an increase in global demand will help black gold regain some of its lost ground. In this regard, a breakthrough of resistance at $ 26.25 and $ 28.35 per barrel, it makes sense to use Brent for purchases.
Brent daily chart:
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