THIS JUST HAPPENED IN GLOBAL CRUDE FUTURES MARKET
Imagine you stopping at a petrol pump to fill the tank on your way back home; instead of you paying the pump operator, he hands you down a couple of 500 rupee notes. Your brain will simply go corona. (Coronabrain is a new term in Urban Dictionary, indicating panic and loss of a sense of focus due to constantly overwhelming circumstances.)
Well, this is what has been happening in the world crude oil futures market. The coronavirus outbreak has not only dried up all demand for petroleum products, it has created a physical gluf of crude oil, with the result that there is no space to hold them.
The real problem is the global supply-demand imbalance, which has started to really manifest itself in lower prices. As production continues relatively unscathed, storages are filling up by the day. The world is using less and less oil and producers now feel how this translates in prices.
The prevailing price levels will continue to force shut-ins and to cause more job losses as operators try to lower costs to be able to cope with the low price environment.
The desperation was palpable in the Nymex futures market this week. The Nymex WTI contract has defied gravity by trading below negative $40 a barrel. This meant that traders were willing to lift deliveries only on payment of extra money. The situation was further complicated by squaring off pressure.
Essentially, with 108 million barrels worth of contract positions still not closed by the traders in the market, the buyers were rushing for the door to avoid taking physical delivery of crude next month because there are no storages available. The swings were most likely exacerbated by algorithms and open contracts by indices and exchange traded funds, resulting in a market with no buyers and a lot of sellers.
Approximately 400 million barrels of crude storage capacity remains globally, a good part of it in the US. With stocks building by an estimated 26.5 million barrels per day in April, it is feared that the storage capacity will get exhausted within a few weeks.
As such, the global storage availability picture now looks grim for June, depressing the prices further for June and July.
The latest forecast for oil demand now projects a decrease of 9.6% for 2020, or 9.6 million barrels per day (bpd) year-on-year. The total oil demand in 2019 was approximately 99.9 million bpd, which is now projected to decline to 90.3 million bpd in 2020.
The month of April is expected to take the biggest hit, with demand for oil estimated at 72.5 million bpd, falling by 27.6 million bpd year on year, a 27.6% drop. Similarly, May’s demand is expected to fall by 19.5%, or 19.3 million bpd to 79.7 million bpd.
It is estimated that the total global demand for road fuels will fall by 9.6%, or by 4.6 million bpd year-on-year. Road fuel demand in 2019 is estimated to have reached 47.7 million bpd. This could now reaching just about 43.1 million bpd in 2020.
Road fuel demand in April is estimated to have dropped 33% already. May’s road fuel demand is now estimated at 38.1 million bpd from 47.6 million bpd last year, down by almost 20%.
India has already seen a 40% drop in oil demand in April. Road fuel has been heavily hit with very strict restrictions enforced as part of the national lockdown in the third week of March. Road fuel in India comprises 70% diesel, as personal transport is largely by public means or two wheelers.
Jet fuel is among the hardest hit. The global commercial air traffic is expected to fall by at least 23% this year versus the levels seen in 2019.Many distressed airlines are now facing heavy cost cuts, laying off unprecedented numbers of employees as many non-essential routes are closed.
Analysts believe that this year will not have the summer air travel peak, which will see global jet fuel demand falling by almost 31% year-on-year, or by at least 2.2 million bpd. Last year’s demand for jet fuel was seen at about 7.2 million bpd.