Negative Oil Price Bottom

When you see oil futures going from $6 to $16 after the oil "experts" on CNBC and Bloomberg say oil prices are probably going to go back negative, I tend to listen to the market and not the analysts. 

You had a classic panic bottom in oil, as the biggest oil ETF, USO, panic dumped a huge chunk of open interest in the NYMEX June Crude Oil futures and rolled it into July and August, effectively selling at the bottom and buying back less (July and August futures are more expensive, so they had to buy less when they rolled over the contracts). 

What happened on Monday was panicked speculators in the May futures who didn't have enough liquidity to sell their holdings as there weren't enough end users who were willing to buy from them, so it was a game of hot potato until prices got so negative that producers who actually were short finally decided to close out their positions.  May futures actually ended up settling at 10.01 when it expired on Tuesday, so that is the price that producers were willing to pay to take delivery, a better indication of WTI oil prices than the negative numbers on Monday.  But the financial media loves to sensationalize everything, so they ran with the negative oil prices story, and figured that since there is very little available storage in Cushing, the same thing would happen in the June contract. 

But there are still several weeks till June, and producers are not going to keep pumping oil and sending it to Cushing when they have to pay to do it.  Its just more cost effective to just shut in the wells.  And that's what is going on right now.  And with the negative price fiasco on Monday, the producers will be even more urgent about cutting production to avoid losses. 

The price action from Tuesday to now, with June CL futures going from $6 to $16 is telling the truth, while the oil "experts" talk about negative prices and tank tops like it's the latest hot fashion. 

I am no oil bull, I'm long term bearish on oil, but in the short term, prices went down not because of fundamentals, but because of irrational fear of negative prices.  The fear of future negative prices makes it much less likely to happen, as now the producers will be cutting more production than they otherwise would have.  This week went a long way towards speeding up the equilibrium between supply and post coronavirus demand. 

But unlike some of the irrational USO buyers on Robinhood or newbies who think that oil is now the bargain of the century, what will likely happen is that WTI oil will have to stay under $20 to keep producers from pumping out too much, and its very unlikely to see negative prices as oil in Cushing will just be diverted to other storage facilities, or on tankers, if the price gets too low.  So that will probably keep WTI oil between $10 and $20 for the next few months.

However, if after the lockdown is lifted and coronavirus cases start going up again, then all bets are off, not only for oil prices, but for the SPX and global equity markets.  The threat of a second lockdown will induce serious panic among not only oil traders but equity traders, and that could actually push WTI oil to near zero and SPX to retest the lows in March at 2174.  

But that's looking a bit too far out, in the near term, the anticipation of lockdowns being removed and people going back to work will keep a bid under both oil and stocks.  Also, OPEC+ plans on having another meeting on May 10 to talk about further production cuts so that's also another positive catalyst for oil.   Definitely not recommending going long oil, but don't recommend a short here either.  Same goes for the SPX, wait for the right levels, we are in the middle of the new range (2730-2870), so not a good risk/reward for either side short term.  Neutral here.