- Negative spot oil prices reflect the extraordinary glut of U.S. oil
- Senate may vote on PPP increase today
Negative spot oil prices reflect the extraordinary glut of U.S. oil — When Russia and Saudi Arabia began their oil-price war in early March, they probably didn’t anticipate that they would be helping to push spot oil prices to negative price levels in the U.S. within a matter of a few weeks, even after agreeing on a 23% production cut. June Brent crude oil futures prices, the benchmark for global oil prices, plunged by -2.51 (-8.94%) to $25.57 on Monday but escaped the worse of the carnage in the spot U.S. oil market. Nevertheless, Saudi Arabia, Russia and other OPEC+ oil producers could be staring down the barrel at a similar situation in Europe and the Middle East once storage facilities are full, possibly within a matter of weeks.
The front-month May 2020 West Texas Intermediate (WTI) crude oil futures contract, which is the benchmark for U.S. oil, felt the brunt of Monday’s carnage as funds rolled out of long positions ahead of today’s expiration of that contract. In an extraordinary development, the May WTI crude oil contract on Monday fell below zero to an all-time low of -$40.32 a barrel and finally settled down -$55.90 at negative -$37.63.
The negative price on the May contract meant that holders of long futures positions had to pay holders of short positions to get them out of their futures contracts and avoid taking delivery of spot oil at the Cushing hub. The CME on Monday gave a special dispensation that allowed crude oil prices to turn negative. If prices had not been allowed to turn negative, there could have been severe physical delivery problems or even defaults when the contract expires today.
The interest rate markets have been dealing with negative yields for a number of years, and there are about $10 trillion of global debt securities that are trading at negative yields. Negative prices have now arrived in force for a key physical commodity market, which is another indicator of the extraordinary times in which we live.
A big factor behind Monday’s plunge in the front month May WTI contract was the U.S. Oil Fund ETF (USO), which accounted for about 25% of outstanding May WTI futures contracts as of last week, according to Bloomberg. As part of its normal monthly roll process, USO had to sell the front-month May contract (at basically any price) and roll the position into the June and July futures contracts.
Monday’s plunge in the May WTI crude oil futures contract into negative territory helped turned prices negative as well for physical crude oil prices with various grades and delivery locations. That meant that Monday’s plunge in the May WTI contract wasn’t just a hiccup in the futures market, but rather had serious implications for the spot physical market as well.
The simple fact is that there were many more sellers than buyers for spot oil on Monday, and sellers had to pay buyers to take the oil off their hands despite heavy losses. Any oil arbitrageur with access to reasonably priced oil storage space had a field day on Monday since he or she was able to buy May crude at -$37, store it for a month, and sell it for June delivery at $20 for a massive profit of $57 per barrel minus transportation, storage, and trading expenses.
The market is hoping for a more balanced supply/demand picture in the future when demand recovers from the pandemic. The June 2020 WTI crude oil futures contract on Monday plunged by -18.38% to $20.43, but at least settled above $20 per barrel. The WTI futures curve shows that the market believes that the current glut will only last until this autumn with the September 2020 contract trading slightly above $30 per barrel. The price of oil then progressively rises to $40 by early 2023 and to $55 by 2030. However, those prices could easily fall sharply if production remains too high, global oil storage facilities remain nearly full, and demand remains weak.
The glut of global crude oil is quickly filling up global storage facilities. Crude stockpiles at Cushing, the delivery point for WTI futures, have jumped 48% to 55 million bbl since the end of February, according to EIA data. Cushing currently has a working storage capacity of only 76 million bbl as of September 30, according to the EIA.
Despite Monday’s plunge in oil prices, oil-sector stocks were able to close higher. The SPDR S&P Oil & Gas Exploration and Production ETF (XOP) on Monday rallied to a new 1-week high and closed +1.53%. The plunge in oil prices was bullish for T-note prices and pushed the 10-year breakeven inflation expectations rate down -6 bp to 0.95%.
Senate may vote on PPP increase today — The Senate as soon as today may try to pass a PPP increase by unanimous consent. The House could vote on the bill as soon as Wednesday. House leaders on Sunday night gave House members notice they might have to return to Washington on Wednesday for a recorded floor vote since there are expected to be objections to passing the bill by unanimous consent.
Washington is reportedly near an agreement on a bill of nearly $500 billion, with $310 billion for the PPP program, $50-60 billion for the separate Economic Injury Disaster Loan Program, $75 billion for hospitals, and $25 billion for virus testing. The bill doesn’t have the aid for state and local governments that the Democrats were demanding, or an increase in SNAP food aid.
The stock market will be pleased if Congress can pass the new rescue bill since the bill will help to keep small businesses afloat and reduce layoffs, thus softening the blow to the labor market and retail spending. However, the Treasury market will not be pleased with the increased deluge of debt that will be necessary to fund the expanded programs.