Crude oil collapse continues amid lack of storage Crude oil collapse continues amid lack of storage Crude oil collapse continues amid lack of storage

Crude oil collapse continues amid lack of storage

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  Crude oil continues to trade lower this Monday with the headline grabber being the near 20% collapse overnight in the soon-to-expire May contract (CLK0). Most active traders have by now moved on to focus on the June contract (CLM0) which is the most active now, both in terms of traded volume and open interest.


What is our trading focus?

OILUKJUN20 – Brent Crude Oil
OILUSJUN20 – WTI Crude Oil
CLM0-N0 - WTI June-July Spread
XOP:arcx – Oil & Gas Exploration & Production
XLE:arcx – Energy Select Sector SPDR Fund (Large-cap US energy stocks)

____________________________________________________________________________________________________

Crude oil continues to trade lower this Monday with the headline grabber being the near 20% collapse overnight in the soon-to-expire May contract (CLK0). Most active traders have by now moved on to focus on the June contract (CLM0) which is the most active now, both in terms of traded volume and open interest.

The expiring contract is now mostly in the hands of physical oil traders and the behavior of the contract confirms what we already feared: That the U.S. is running out of storage at Cushing, Oklahoma, the delivery hub for WTI crude oil futures traded in New York. The weekly stock report from the Energy information Administration shows how the Covid-19 related lock downs in the U.S. has temporarily killed demand for gasoline. Last week’s report found record levels of gasoline while implied demand had dropped to a record low (since 1992).

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.

Source: Saxo Bank

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.

Source: Bloomberg

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.