Monday’s plunge into negative price territory brings tremors that resonate for longer. Panic in the oil futures market seems to put exceptional pressure on prices, i.e. contracts close to expiry, detaching oil from the fundamentals momentarily. High uncertainty clouds the very near-term outlook, and we stick to our Neutral view. Yet, we remain confident in an oil price recovery longer term, with prices back above USD 30 late summer.
Monday’s historic price plunge into negative territory caused tremors which will rattle the oil market for longer. Of course, the full insights of the happenings will only be uncovered over time. However, it still looks like that the brief period of negative prices was a glitch, caused by a combination of factors including a contract just before expiry and physical delivery, and a rapidly filling storage hub, where the still available capacities had been fully booked already.
The event also sheds light on the fact that there is anything but one oil price, but instead, a whole lot of them reflecting different regional trading hubs and different futures time horizons. Our preferred benchmark is Brent, not least given the stability provided by the underlying seaborne trading. The flows of money into and out of the oil futures market causes deviations from fundamentally justified levels, especially if the underlying motivation is not purely fundamental but excessive optimism or excessive pessimism. Just as the geopolitical fears caused an oil spike at the beginning of the year, yesterday’s and today’s pressure on oil prices, i.e. contracts for June delivery, seems to largely come from panic selling by investors.
Index investments vary in terms of methodology, i.e. how and when they roll their exposure. Some indices are already invested beyond the June contract, others not. With almost certainty, indices were not the element causing the glitch on Monday. Just as they are the tool enabling the panic and price pressure today, they are also the tool that allowed some of the hedging of the oil producers, namely in the shale business, safe-guarding part of the cash flows and thus offering a life line to these companies. Given the high uncertainty affecting the very near-term outlook, we stick to the Neutral view, but we still see prices recovering thereafter.