Oil massively drops to start the week

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U.S. crude falls down more than 20% as traders are worried over low demand due to the COVID-19 pandemic. The May oil futures contract is also set to expire on Tuesday, April 21.

Ever since the last OPEC meeting held in the early weeks of April to cutting production as low as 10 million barrels per day, oil has been sluggish lately and to start the week – it’s starting to plummet.

Price hikes triggered by Saudi Aramco, the world’s biggest oil producer, may have also caused a massive drop in its current prices.

West Texas Intermediate (WTI) crude futures for May fell to $13.37 — its lowest level in over 21 years.

Also as of this writing, international benchmark Brent crude futures slipped 3.7% lower at $27.04.

Oil traders: Trading the paper vs trading the physical

Commodity experts are now concerned with the massive price drops in oil that the June contract for WTI also got affected, falling more than 8%.

However, ANZ’s Daniel Hynes told CNBC’s Squawk Box in an elaborate email exchange:

“There will be traders in the market who only want to trade the paper, so they will roll over into the next futures contract. That means selling the May contract and buying the June […] But there are also traders who are buying for clients who trade the physical. So they hold the contract to expiry and deliver the crude.”

Aside from citing the different traders’ perspective of trading the paper versus the physical, Hynes also added that prices are likely to “remain under pressure” over the next months.

We might run out of oil soon

Since the U.S. storage for oil is rising sharply, with the coronavirus crisis adding fuel to the fire, reducing consumption might be a challenge.

As early as the start of the second quarter, Goldman Sachs cautioned investors that oil prices will be extremely negative due to the impact of the coronavirus.

In addition, other analysts already warned that the world might run out of oil storage spaces for the next months to come.

Steve Puckett, executive chairman of TRI-ZEN International, an energy consultancy also reported to CNBC that oil storage is already “exceeding 70% and approaching operating max.”

Furthermore, head of oil markets at Rystad Energy Bjornar Tonhaugen sees the supply and demand imbalance as he wrote in a Monday note:

“The real problem of the global supply-demand imbalance has started to really manifest itself in prices […] As production continues relatively unscathed, storages are filling up by the day.”

China may have doubled storage during the demand crisis

In China, the word ‘crisis’ comes in two meanings: ‘danger’ and ‘opportunity’.

A Reuters opinion article suggested that as early as the first quarter of 2020, China may have already been pushing crude oil into its storage tanks at almost double the rate by using previous data recorded last 2019.

China’s crude oil imports were at 10.1 million barrels per day (bpd) in the first three months of 2019, according to a report last March 23 at the U.S. Energy Information Administration (EIA)

Images courtesy of jpenrose/Pixabay, PublicDomainPictures/Pixabay

Alec Padua

Alec a former mobile app developer turned independent singer-songwriter and busker based in the Philippines, who goes by the stage name "Alex Corner". He has released songs on Spotify and other music digital platforms. A self-taught trader and financial market enthusiast, he also started his own YouTube channel and blog called "The Trading Comedy" where he documents his trading journey in the Philippine Stock Market and beyond. He is also a casual gamer and streamer who enjoys FPS, RPG, and strategy games as well as conducting live charting sessions in the financial markets.

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