The Phil Flynn Energy Report
Nowhere to Run to, Nowhere to Hide
Oil can't go below zero. Oh, yes, it can.
After the CME Group clarified that point yesterday, it created an oil crash unlike anything ever seen in the WTI futures contract. While we have had particular oil delivery points for oil, the concept of negative oil opens up a whole new world of risk in the global market with comprehensive storage facilities filling up. Storage wars have begun. Those with storage can prosper. If not, you have to pay to get rid of your oil.
It’s also a devastating blow to the oil industry. The short term will be all about demand destruction, yet for a long time, we will look at this time in history as the point that oil production destruction began. It also makes the ability of beleaguered shale companies to borrow money because the concept of negative oil price may be too much risk for many banks to bear. While the back end of the oil curve is signaling that things will get better, the plunge in the May contract — and the possibility of sharply negative prices — are shaking confidence in even the solid back end of the curve. That inability to have confidence will lead to what could become the most significant pullback in investment in history. The longer-term ramifications of this sub-zero price action are yet to be felt.
President Trump suggested that the sell-off was a "financial squeeze.” "The problem is no one is driving a car anywhere in the world, essentially…Factories are closed, businesses are closed," Trump said. "We had a lot of energy to start with, oil in particular, and then all of a sudden they lost 40%, 50% of their market." He said that OPEC and Russia, "They have to do more by the market, it's the same thing over here. If the market is the way it is, people are going to slow it down, or they're going to stop. That's going to be automatic, and that's happening."
Overnight reports that Russia is demanding its energy producers cut production by 20% while at the same time saying that yesterday's negative oil price weren’t a concern. Kremlin spokesman, Dmitry Peskov, reportedly said that the negative oil prices are just a "trading issue" and that "This isn't a reason for overly negative assessments of the current reality.”
All eyes today will be on the June WTI futures contract that’s giving up the ghost. It tried to stay healthy in the world of negative oil but is losing confidence.
We are also waiting to see if the Texas Railroad Commission will order oil production limits for the first time since 1973. How that impacts the market has yet to be seen. Big oil is against it, smaller producers are for it. It also opens up a range of issues about anti-trust laws but could give a boost to this market.
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