On April 21, commodity markets witnessed history as oil futures for May expires reaching negative territory hitting -US$37.63 [AU$59.72] for the first time.
Yesterday, oil markets began to drop more than 20% to start the week and the aftermath of the overnight drop may reflect later on in the U.S. markets.
However, despite the unexpected plummet, the May contract managed to bounce back to $20 levels just before it moves to June.
Oil market shows how broken the world economy is
Jim Cramer on CNBC’s Mad Money expressed on Monday on his show that this historic event has become an “emblematic of everything” that’s “going wrong” in the economy as he adds:
“So many things are broken, so many prices have gone haywire in every different industry that the averages themselves are no longer capable of relaying what publicly traded companies are actually worth.”
The oil drop also makes sense to some analysts because even if other countries are slowly easing lockdown measures, the majority of the global economy is still on a slow down.
The bigger picture looks bright
At first, the public may see this as negative news for oil. However, others are looking at this event as a minor setback, because today is the deadline for the oil futures contract for May.
Since futures contracts are tied to a specific delivery date, the price typically converges with the physical price of oil as the final buyers of these contracts are institutions such as refineries or airlines that are responsible for physical delivery of the oil.
However, for the typical traders, most brokers give cash settlements for those who planned to hold the contract until its expiration.
Futures contracts trade by the month. The contract for June delivery was 16% lower at $21.04 per barrel.
So after the May contract expires on April 21, oil could be back above $20.
In addition, John Kilduff from Again Capital, reports that the cause of the massive drop from this particular futures contract is due to storage tanks getting full.
However, he also claims that the future for oil looks brighter in the bigger picture as he adds:
“The higher-priced, longer-dated futures contracts are indicative of the market expecting some level of clearing in the cash market over the course of the next several months […] Given the rapid decline in the U.S. oil rig count and the expected cutback by OPEC+ members that is a reasonable assumption.”
The International Energy Agency (IEA) already warned in its closely-monitored monthly oil report that demand in April could be 29 million barrels per day – levels not seen 25 years.
This historic event could be the start of worse things to come.