"Today’s optimism reflected in the front month futures prices for Brent and WTI, both of which now are for settlement for the month of Jun-20, is not justified. The market will run out of practical storage capacity, and even the “nameplate” storage capacity onshore, before we get to June.
We got a small dose of bizarre on Monday this week, when the May-20 contract for WTI delivered at the Cushing, Oklahoma storage hub, closed at minus US$37.63/bbl. But it actually isn’t an anomaly – when a commodity contract with physical delivery is close to settle and storage is expected to be exhausted at the delivery point, the price of the commodity becomes negative for buyers to accept taking the crude to transport or store the crude (more expensively) elsewhere.
We believe the market got the final wake-up call about the urgency of the soon-to-be-full storage situation globally this week, and we believe the downwards pressure on physical prices will continue before long. It will even spill over into the separate beast, Brent futures for Jun-20, which essentially is the highest crude price marker on the planet right now. Physical prices from the North Sea to the Middle East have for weeks traded at US$5-10 discounts to the ICE Brent futures, inflicting more economic pain on global oil producers already than what the Brent price “on the screen” suggests.
No positive surprises for economic indicators nor commodity fundamentals justify the current price levels. The only is the less-horrendous-than-expected US crude stock build of 15 million bbl last week, due to lag in the US crude imports reporting.
The flash PMIs for Eurozone’s manufacturing and services sector yesterday printed in the teens, suggesting the deepest European recession since WWII. Our latest oil market balances still show an enormous 26.3 million bpd implied stock build for Apr-20, now declining to 14.4 million bpd for May-20 as the OPEC+ cuts come into effect.
Fast-forwarding of the start of some of the cuts, for instance mulled today by Kuwait, is helpful, but not enough.
The real question for everyone in the market now, is whether those implied coming stock build numbers of 26 or 14 million bpd can be practically realised at all, because as our analysis show, we will essentially run out of storage capacity between early-May and end-of-May under our current demand loss estimates.
As we see it, a wave of shut-ins is inevitable for the oil market to come closer to a balance. Not having enough storage is not only a theoretical problem but a practical one too. Unless more production shuts down, the extracted oil will literally have nowhere else to be stored. Which implies a forced shutdown across several locations. This is not something the industry has ever seen or ever been prepared for, maybe that is why we see a slow reaction. A major shock is brewing for producers and unless there is a firmer response from their side to voluntarily slash output, we will soon be discussing about the greatest energy crisis in history."
Read the article online at: https://www.oilfieldtechnology.com/special-reports/24042020/oil-prices-stabilise-but-storage-crisis-approaches/