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More than just a rollover issue? Oil markets are in turmoil again today as both Brent and WTI contracts come under severe pressure, with volatility extremely elevated.

Severe dislocation in the May contract is spilling over into future months with the benchmark June WTI contract tumbling 40% or so to take an $11 handle at one point this morning. It’s rebounded very sharply back to $16.50. July remains firmer above $20. Whilst the May contract went absurdly low because traders had to avoid taking physical delivery at all costs, the forward contracts look too high when you consider how much demand destruction is out there. If this super contango market persists we may see further implosions like we saw yesterday as we approach settlement as traders are caught the wrong side of the expiry with nowhere to put it.

We are also seeing spill-overs into Brent which is facing the challenges with the front month – which we roll this Friday – dipping under $20 before paring losses and rallying back to $22. We will watch this one carefully to see whether it too shows severe stress, however volumes in the Jun contract remain high, unlike the May WTI contract which had become very illiquid. Fewer constraints on storage and the fact Brent is a seaborne commodity will help and should mean it outperforms WTI in the coming months.

We’ve talked at length about this already with regards to the fact storage constraints are not going away any time soon unless you get a pickup in demand, which is not forthcoming. I think also demand destruction is worse than the refiners thought it would be. We also note the reports of a large volume of Saudi oil making its way to the US, which were loaded and shipped prior to OPEC+ deal when the Saudis were flooding the market with cheap crude.

Fundamentally there is still a massive supply-demand imbalance which will take time to work its way through. OPEC+ cuts won’t really help for at least a month. We need to see the US economy moving again for WTI to recover.  US producers don’t want to endure the cost of voluntary shut-ins, it’s just not that easy to turn taps off.

Equities are suffering the fallout from this oil implosion with European bourses -c2% and the Dow set to open around 400 points lower and the S&P 500 likely to fall below 2800. I would worry about what impact this crude market stress will have on credit markets and banks in particular as these companies won’t be able to pay their debt. Remember US shale was facing a wall of debt this year through to 2022 that already threatened to blow a hole in the industry.

Whether we look at WTI or Brent, bulls will hope the rejection of the lows marks a bottom but the pressure appears relentless.

Brent Oil Futures, 1-Hour Chart, Marketsx – 11.05 UTC+1, April 21st, 2020

Crude Oil Futures, 1-Hour Chart, Marketsx – 11.05 UTC+1, April 21st, 2020

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