Crude oil collapse continues amid lack of storage

As gasoline tanks begin to fill the demand for crude oil drops and this development has increased demand for storage. With storage filling up the price of oil for immediate delivery has tanked. The near 9 dollar spread between May and June is a clear sign that physical oil traders have no space available. It they had they could buy May crude oil, take delivery, store it and then sell it back into the market in June earning a one-month return of close to 60%.

Speculators having bought the June contract now risks that it could get pulled lower over the coming weeks towards where the May is currently trading. Only a major change in the fundamental outlook through lower production, due to producers being forced out of business or leave wells idle, or improved demand for fuel can prevent.

NOTE on oil ETFs: During the past month the largest actively-managed long-only oil-focused ETFs, such as USO:arcx and UCO:arcx boosted their net holdings of crude by more than 400%. These ETF’s are predominantly positioned at the front of the futures curve and will be exposed to rolling losses every month until the market fundamentals eventually stabilizes, and that could take several months. As mentioned the soon to expire WTI May contract (CLK0) trades more than 50% below the June contract (CLM0).

Unless the fundamental outlook changes over the next four weeks the June contract risks the same fate as the expiring May and the drop will be reflected in the price of these ETFs. On that basis we cannot reiterate enough how difficult and potential costly it can be to try to bottom fish “cheap” oil when the fundamentals are this poor as reflected through a very steep contango.