Crude oil price recovery
Is the recent crude oil price recovery, a rally with lights?
In the last two days from April 23, Tuesday’s settle of $11.57 to Thursday’s settle West Texas Instruments (WTI) has gained 42.6%.
As usual, there is a mixed bag of views as to whether the recent crude oil price recovery will continue going forward, albeit into the next month.
Goldman Sachs, a recently turned oil bull is touting the view that the recent crude oil price recovery can extend further gains in May back to cash-cost levels ($25/bbl for WTI).
So, the operative words in the investment bank’s bullish oil review are “with still-high price volatility” oil will move back to cash-cost levels.
Here is my 50 cents on why investors/traders should be skeptical about the crude oil price recovery continuing into May and with a hedge based on no natural disasters or threats of imminent war in hot spot regions occurring.
The current oil price recovery could be held back by tanker congestion as the oil market glut moves from tanks to tankers
Already 76 tankers are currently waiting to unload in US ports, something not mentioned in the bullish oil report. Included in the tanker congestion off US oil ports are 28 Saudi oil tankers, which are carrying a total of 43 million barrels and expected to arrive on the US Gulf and West within the next 21 days.
Fear for what a 28 Saudi oil tankers flotilla would do for the already depressed oil prices, which have crashed below cash-cost levels, U.S. Senator Ted Cruz, from the oil-producing state of Texas, said on Twitter on Tuesday: “My message to the Saudis: TURN THE TANKERS THE HELL AROUND.”
So oil tanker congestion is a factor in the equation, which could dampen the recent crude oil price recovery
Put simply, if all the 28 Saudi tankers unloaded the crude they carry ( 43 million barrels) that would offset all the production reductions from March levels.
In the last five weeks, onshore inventories held in floating top tanks climbed 180mn bbl, which indicates that builds have averaged roughly 4.3mn bpd since mid-March.
The current oil price recovery could be derailed by tanker congestions with its onshore inventories build-up of approximately 4.3mn b/d.
Moreover, the lack of storage space underscores the current oil glut which is a further headwind on May’s oil price recovery.
Saudi Arabia tried to seek storage options for the cargoes from tanker owners when the ships were chartered last month, but many were discouraged due to the booming tanker rates.
“Europe looks full, but surely if the Saudis offer it at really cheap levels, buyers would take it” a source with an international trading firm said. “Some still have storage spaces or may agree to float it for some time”.
It is the scarcity of available storage space and the rising cost of oil storage due to failing fundamentals from a simultaneous supply and demand shock that could hold back the current oil price recovery.
Last month’s oil demand shock was triggered by a global lock-down and quarantine which has paralyzed air and ground travel. Supply shock was also caused by an OPEC (oil producers) walkout on supply cuts and oversupply. So the failing fundamentals resulted in a disequilibrium oil price last month. OPEC’s agreed cuts fell short of expectations based on the loss of demand due to the pandemic, which some have estimated at 30 million bpd from a 97 million bpd in 2016.
Will OPEC’s new deal address the supply imbalance and thereby support the current oil price recovery?
OPEC+ has agreed to remove 9.7 million bpd of oil from the market on April 12 which will begin on 1 May 2020, for an initial period of two months that concludes on 30 June 2020.
But OPEC is cutting output from a high output level, bearing in mind that OPEC pumped a total of 30.25 million bpd of oil in April, the highest level since March 2019 and a rise of 1.61 million bpd compared to March 2020.
Meanwhile, oil demand collapsed in April’s great lockdown and quarantines leaving an estimated 30 million bpd of oil looking for a buyer
So, the cratering demand and oversupply of crude oil explains why Cushing, Oklahoma oil storage tanks are near full with 76 tankers waiting off the US oil ports to unload. The demand, supply shocks have created the largest oil glut ever recorded and it will take months to reach a price equilibrium, bearing in mind OPEC’s recent agreement to remove 9.7 million bpd of oil from the market needs to be stepped up to 15 million bpd of oil, according to some estimates.
The current oil price recovery is unlikely to materialize in May, given no black swan geopolitical risk taking place
On April 20, the May WTI contract made history after it settled at negative $37.63. On the same day, the June contract finished the day down 18%.
But could another negative monthly oil contract happen again?
Yes, it is possible given the size of the current oil glut, inadequate OPEC cuts, and waning demand.
But this time it may not be about storage.
The Chicago Mercantile Exchange recently raised its margin requirements for forwarding oil contracts. The June contract now requires a margin of $10,000.
Each contract is 1,000 barrels of oil and simple math tells us that $10 per barrel is a key level to watch for traders because if the price dips below $10 that will trigger margin calls, more selling with the price continuing to fall and more vicious circle selling.
In short, the recent crude oil price recovery could be a rally without lights, albeit in the short term
But ultimately supply will be cut and price in the long term will stabilize to the very least cash-cost levels ($25/bbl for WTI). Whether the journey to cash cost levels will be achieved by an accord or throat-cutting remains to be seen. Meanwhile, expect volatile oil prices going forward.