The 'Cock Up At Cushing' and will Brent expiry be as volatile?

[Richard Rawlinson + 8]

Last week we saw WTI settle negative -$37.63 upon expiry. Why?

When a WTI contract expires you have 3 choices:
1. Accept the physical delivery into Cushing
2. Sell the product on 
3. Store the product 

As i have discussed, alot lately, there has been a large price discolation between futures and physical and this is potentially one of the reasons why the WTI contract crashed.

The speculative traders (read USO ETF with 500k individuals pouring over 3billion into it since March) were not aware of the expiry details or if they were aware, they thought they could do points 2 or 3 above and sell it on or store it. Which is an acceptable and common practice during times, not during global lockdown and an economic meltdown.

We are at a 'Tank Top' stage where storage is basically full and what isn't yet in storage has already been presold/allocated. With supply at all time highs, available storage capacity at all time lows (Cushing at 71% capacity-55m bbls) simple economics came into play. Over supply and no demand. Point to note here - the US had its highest ever weekly crude build of 19.3million bbls in week 10th April and another 20 VLCC's  (Very Large Crude Carriers - circa 40mill bbls) are headed to the US from Saudi; whom have priced (OSP) their product way under Brent and WTI to try and induce some buying appetite.

This may not be about price for much longer, it may not even be now, its about 'location location location'. WTI is landlocked so I have a feeling either a Trump Tariff is on it's way or maybe a flat out import ban until the economy reopens.

The monumental difference between WTI contracts and Brent contracts is the later are cash settled and not physically delivered so i wouldn't expect the same level of volatility upon Brent expiry but non the less the Dated Brent complex could come under further pressure.

The North Sea Dated benchmark (BFOET basket - Brent, Forties, Oseberg, Ekofisk and Troll) is used to price more than half of the world's crude. Spreads between Brent, WTI and Dubai determine trade flows, as buyers and sellers try to take advantage of arbitrage, freight and geographical economics.

Some recent stats:

👉ICE Brent crude front month future traded $16/bbl- lowest since 1999
👉Dated Brent assessed at $13.24/b - lowest since 1999
👉44% down since April 9th OPEC+ meeting
👉The spread between ICE Brent futures and physical Dated Brent is circa $6 but hit a record high of $10/b recently.
👉29mill bbls a day (maybe more?) of demand are out of the Global market
👉26million Americans unemployed (so far...)
👉Global crude stocks up 270mill this year amd now totalling nearly 3 billion

With this continued oversupply and floating storage already over 220+mil bbls, next week could still be very eventfull.

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Edited April 25, 2020 by Richard Rawlinson

[Ironflimmer + 18]

Yes, it will indeed be an interesting coming week or 4 weeks until June contract closes.

There is no chance that demand will pick up much soon and there is certainly less chance that supply will adjust to current demand levels, so the build up of stockpile will simply continue or oil will be spilled somewhere in oceans or on land. I hope we will not face environmental disasters on top of this.

How far down do you reckon the Brent will be traded? Single digits?

[James Regan + 1,776]

1 hour ago, Ironflimmer said:

How far down do you reckon the Brent will be traded? Single digits?

Brent does not have the same constraints applied to it as WTI, if Brent goes to single digits, WTI will evaporate. Brent is still being traded sold and bought no stockpiling issues like WTI, this is a localised phenomenon, sure Brent will take a hit but nothing like WTI. 

[Ironflimmer + 18]

Thanks for your reply, James.

While I understand that there is not the stockpiling issue with Brent, then there is still the tanker transportation issue. Tanker freight rates have multiplied by at least x16 over the last year and many countries are now using tankers for storage. That will put a lot of pressure on Brent, since it needs be taken away from the well.

Was that issue already taken into consideration in your above reply or is that another factor to observe?

[James Regan + 1,776]

5 minutes ago, Ironflimmer said:

Thanks for your reply, James.

While I understand that there is not the stockpiling issue with Brent, then there is still the tanker transportation issue. Tanker freight rates have multiplied by at least x16 over the last year and many countries are now using tankers for storage. That will put a lot of pressure on Brent, since it needs be taken away from the well.

Was that issue already taken into consideration in your above reply or is that another factor to observe?

That crude will go elsewhere if the US decides not to take it, which they will. Smoke and mirrors, Opium for the masses type rhetoric. If these tankers were US coming from Venezuela it would be a whole different story. from the WEST coast there are many countries who will take it. This cycle will only play out for max three months, June and Julys futures may go negative, If USA doesn't need KSA crude why on earth are they ordering it?

[Gini + 7]

1 hour ago, James Regan said:

This cycle will only play out for max three months, June and Julys futures may go negative, If USA doesn't need KSA crude why on earth are they ordering it?

They keep ordering it because the Saudis own the largest refinery in America, and the Americans like to have customers for their arms export racket?

[Douglas Buckland + 6,308]

13 minutes ago, Gini said:

They keep ordering it because the Saudis own the largest refinery in America, and the Americans like to have customers for their arms export racket?

Those damn Yanks! A pox on those heathens!

[Richard Rawlinson + 8]

Thanks for commenting everyone.

 

Anyone brave enough to start a poll on a Brent settle price...

[Douglas Buckland + 6,308]

2 hours ago, James Regan said:

That crude will go elsewhere if the US decides not to take it, which they will. Smoke and mirrors, Opium for the masses type rhetoric. If these tankers were US coming from Venezuela it would be a whole different story. from the WEST coast there are many countries who will take it. This cycle will only play out for max three months, June and Julys futures may go negative, If USA doesn't need KSA crude why on earth are they ordering it?

Maybe the Saudis are ordering it for their 100% owned refinery on the Gulf coast. Ca undersell anything out of Cushing effectively crushing LTO...ever think about that?

[Douglas Buckland + 6,308]

18 minutes ago, Gini said:

They keep ordering it because the Saudis own the largest refinery in America, and the Americans like to have customers for their arms export racket?

If we can’t sell our oil, arms are a good substitute....