Oil Crude Drops to a Historical Low and Hits Negative Territory

On Monday the price of West Texas Intermediate crude oil for the month of May dropped over 190% into negative territory.

Many market analysts had remarks of oil hitting its lowest levels in history on Monday.

Helima Croft, global head of commodity strategy at RBC Capital Markets said, “This is a really sort of interesting, unique story to the oil market. I mean, what has been hit the hardest by this pandemic has been vehicle traffic use. I mean, people are not flying. They are not driving. And so, this is a real story about storage filling up. … We’re expecting Cushing to reach tank tops by mid-May. I mean, there are other places that you can store this crude, potentially in, like, Louisiana, but until we get signs that U.S. gasoline demand is improving, that people are going to drive again, we are continuing to be very, very bearish on the demand outlook for oil. Now, there was this OPEC cut last week, this historic cut. There was a lot of focus on that. And that’s really sort of turning off the tap in the bathtub that’s overflowing, and so the situation would be far worse. But the problem is those cuts don’t take effect ’til May 1. There is still a lot of crude that is on the water right now that is going to refineries that do not need it. And so that is the challenge right now: Those OPEC cuts are not coming until May, a ton of crude on the water and demand continuing to collapse.”

Doug Terreson, a fundamental research analyst at Evercore ISI commented, “Our report today was called ‘A Dog’s Breakfast.’ That’s a phrase for something that’s extremely messy, which, obviously, the oil market is today as we reach 20-year lows. And the reason for the weakness is related to a couple of factors. First, expectations for oil demand and GDP are falling in an unprecedented way and by around 10 times that which we normally see in a recession.
And so, while the equity market is suggesting that we’re going to have a coronavirus solution in coming quarters and that demand will recover, and we all hope that is the case, the problem is that in the near term, meaning the second quarter of 2020, supply is going to be over demand by around 15 million barrels per day or so, which, when combined with the 7-million-barrel build in the first quarter, puts us in a scenario whereby we’re probably not going to have enough storage to accommodate this supply. So, in this scenario, prices for crude oil are going to remain very weak. They’re going to be near variable production costs for marginal producers, which supports our call for Brent [at $]25 in the second quarter. But WTI … is probably going to be 70-80% of that amount. If global economic growth recovers beyond that point and OPEC and other supply cuts hold, then we’re going to see inventories decline from record levels of 90 days at the middle of this year to maybe 60 days at the end of 2020 and 50 at the end of 2021. But this is high in relation to 40 years historically. … We could have a recovery in Brent to 40 by the end of this year, but we have to have some help from the demand side.”

CNBC’s Jim Cramer, the host of “Mad Money,” said, “There really is no place to put the oil, and no one’s stopping to produce. And it’s funny: There’s no upside. No one’s talking about the good news of it, and I think that’s because no one’s going anywhere to take advantage of it, so to speak. And you watch the airline stocks go down. That used to be something that moved up. So, almost everything that happens is viewed as negative in the physical commodity world.”