What is our trading focus?
OILUKJUN20 – Brent Crude Oil (June)
OILUSJUL20 – WTI Crude Oil (July)
GSG:arcx - iShares S&P GSCI Commodity Index
DJP:arcx - iPath Bloomberg Commodity Index
XOP:arcx – Oil & Gas Exploration & Production
XLE:arcx – Energy Select Sector SPDR Fund (Large-cap US energy stocks)
Crude oil has stabilized following the carnage that followed the collapse and move to negative prices of the now expired May. The short-term fundamental outlook however remains very disturbing given the potential need for more than 15 million barrels/day of forced shut-ins from producers around the world. The recovery led by WTI crude oil today has been driven by hopes that the EIA in their weekly inventory report may show signs that the bottom in demand has been reached. In addition the market has just received an additional boost from surging stocks amid renewed hopes for a drug to fight the coronavirus.
Once the world run out of facilities to store unwanted crude oil, production needs to equal demand. That can only be achieved by a major cut in production, not necessarily from the high cost producers, but primarily from those not having a buyer for their oil. Norwegian-based Rystad Energy in their latest report said they expects demand to drop by 28 million barrels per day this month; by 21 million next month; and by 16 million in June. Goldman Sachs in another report saw global storage facilities filling up within the next month.
The exodus out of the June WTI crude oil futures contract (CLM0) continued yesterday after S&P Global Inc., the company behind the most popular index (GSG:arcx) told clients to roll all their exposure out of June into July. The index which is tracked by billions of dollars in passive long-only funds such as pension funds normally roll their exposure between the 5th and the 9th trading day of the month. It highlights the risk that June could repeat the May move to zero as Cushing remains full. Another major commodity tracker, the Bloomberg Commodity Index (DJP:arcx) have rolled its exposure from July to August. The July contract shown below has found support at $17.50/b.