Oil Explained & Why Next Month Might Be The Same

Okay, very good morning guys. It's Tuesday, 21st of April. I hope you are doing well and you join us at quite a historic moment that happened in markets last night. And as you can see to the side of me, Will and I were still at our desks last night. We managed to catch the oil move as it was unfolding live and a really great 12-minute little session that, that Will did yesterday. So if you go on our YouTube channel, um, obviously please subscribe to the channel. That'd be much appreciated first and foremost. But if you scroll down, we have this kind of morning briefing section. So any sort of snap market analysis pieces that we do, we put it in there. And we, we just dropped this one about 10 hours ago, and it's already got, you know, nearly 25,000 views, which is just amazing. But I think that's down to the fact that You know, it is a little bit unusual. Well, not a little bit, it's very unusual. Obviously, the price of oil yesterday trading below zero for the first time in history. Traders basically willing to pay $40 a barrel just to get someone to take crude off their hands, which is absolutely unprecedented. And, you know, this was the, the move that really solidifies that. Looking at the, the kind of first month contract, so in this case would have been the expiring today May futures contract getting all the way down. And you can see here, for the first time ever, breaking the kind of zero bound on the downside. So definitely this is the real talking point. And thankfully it was something where, for some of our new kind of trainee traders that had started our program yesterday, this was a session that we spoke at length about this specific issue about, you know, this extreme contango at the moment and what exactly does that mean, how does it happen, and so on. So Hopefully everyone was, was well prepared for that, but absolutely jump back onto the YouTube channel. That video there, What Just Happened to Oil Prices, um, that was direct from Will, our managing director. It's a fantastic kind of glimpse to seeing it all unravel as it did last night. So yeah, I'm going to give you a summary, but definitely check that out as well when you get 12 minutes spare going forward throughout the rest of the day. Now just a quick look at this morning, what is going on? Well, You know, that is the real focal point. There's been a little bit of a dip overnight in equity index futures. Quite a few people, Bloomberg pinning that on actually some news from the North Korean leader Kim Jong-un, who's said to be unwell at the moment following some surgery, and perhaps then some apprehension about who his potential replacement might be. Not sure if I buy into that a great deal, to be honest. And anytime we have seen in the past kind of North Korean related news, obviously more based around kind of, um, kind of ballistic missile testing that we had back, what, in 2017 type era. That generally the news tends to be faded quite quickly, and I don't really see this being too much different. And that's already kind of happening at the moment as we go into the European Open. Equity index futures just bumping up a touch. And also to kind of validate that, that idea, gold and T-notes not really responding at all. Uh, gold fairly flat, down about $3, trading at $1,708 in the futures. The 10-year up about 2.5%. I'm looking at crude. Where does it trade this morning before we get into what exactly happened yesterday? I'm looking at the June contract. Obviously, this is where the volume is, so the kind of classified front month, and that remains, uh, just above $20, and we did run down to very close 19 cents toward the, the figure or the handle in that kind of late overnight or late US trade. Probably now we've etched out a fairly significant point of resistance here, which we got to test in the Asia-Pacific session before we've come back down a decent kind of buck and 20 cents. And that being that initial kind of blip low that we had at the reopening of Globex trade to kick off the week yesterday. So oil in the June contract is positive about a dollar, but absolutely still warrants monitoring. And in the May contract, obviously due for expiration today, uh, after touching obviously down at a negative $40.32, is now up trading at a positive $1.36 for the time being. But again, I would say you want to be focusing on the June contract. Don't worry too much about that May one at the moment, but I'm going to cycle you through a few different things. So first of all, let's just explain from a top level what exactly happened last night. And an easy way for me to summarize this was that the primary reason behind it was because of the end of the May contract. So with the crude futures contracts, they're a little bit different from, say, equity in terms of equity indices, or if you were trading, say, the US T-note. Those typically go in 4 kind of calendar-based quarter futures contracts. So typically March, June, SEP, and DEC. Whereas with oil, given the fact that there's a degree of physical delivery tied to the receipt, if you let or hold the contract to expiration, meaning you'll take delivery, and that's going to be an important point we'll talk about that's led to what happened yesterday. But basically, because the end of May contract forces kind of physical receipt at a time then when storage capacity is low. And given that, that timing, they've got to get it off their hands. Given the fact that predominant volume of the futures markets is speculators, they have no intention at all about taking delivery of physical barrels of oil. And that means then it leads to forced selling to the point where traders were willing to pay $40, i.e., a negative price of about $40.30, just to get someone to take that crude off their hands because they definitely don't want receipt of it. Um, this then leads us on to a little bit more detail about here. So this is, uh, Cushing, Oklahoma. So this is where we look at, uh, the specific geographic kind of hub, which is the storage point of oil in North America before then it kind of gets distributed elsewhere within the country and beyond. And in the past 3 weeks, crude has been flowing into Cushing at a breakneck speed, averaging about 745,000 barrels per day and taking in more oil from an equivalent point of view than what the entire country of Belgium would consume. That's going in every single day at the moment. Um, now at that rate, if that were to remain consistent, it would basically mean then that tanks— um, if I switch over my chart here, this is the, the the, the Cushing chart so you can see the massive jump that we've had. At this rate, tanks would then be full before the end of May, something that's never happened before. Uh, we have got into previous— many years ago, or several years ago, we got to a point where that was looking likely, and that was when prices came under quite dramatic pressure a few years ago. And if we were to get absolutely full, that has never happened before. So just the idea of that approaching And given the rate of which now this, as you can see this bar chart, these numbers are rising, that is all but inevitable. And the problem you have, of course, is we're in an extended lockdown due to the health pandemic of coronavirus at the moment. So the idea being here is that although OPEC have cut this deal, the ability for them to react in terms of on the supply side quick enough And there's been some talk about them bringing those forwards and doing it more soon. Uh, but also as well, this natural kind of offsetting of production in America, it all can't happen quick enough because of the expiration being today was the problem you had yesterday. The other thing as well, and a few other things to be mindful of that probably exacerbated this move, I've just switched over my chart now and I'm looking at something else. So for one, hedge funds uh, were net purchasers of petroleum futures and options for the third week running last week. Now what we're looking at here is the largest crude ETF known as the US Oil Fund, and it received basically billions of dollars in fresh funds, uh, in the most recent week, accumulating a fifth of all of its outstanding contracts in the May futures contract. But last week what we had, it rolled its position because given we have these monthly futures expirations in oil, it rolled from May until June. And that meant that all of that massive kind of ownership of these contracts by the, the US Oil Fund ETF then evaporated from May because it shifted over to June. And that coupled with retail investors in particular were trying to pick the turning point in oil, obviously getting caught quite badly there on the back of this. So what does this mean? I mean, going forward, I think what's— well, first of all, what's a mechanism that people can do to try to counteract this now from the forces that be, whether it be Trump or these oil-producing nations? Well, for one, President Trump responded to these negative prices. He spoke from the White House yesterday. In a press conference, and he plans to fill the spare space in the SPR, the Strategic Petroleum Reserve, um, and by saying he would look into a proposal to stop shipments of Saudi Arabian oil that are currently en route to the US. Because remember, when it gets to the US, where are they going to put it? That's only going to force this kind of extreme contagion situation even further. Um, can OPEC help? I guess that's going to be a question that some people might ask. And the point being is no. I mean, the OPEC deal that they've struck, OPEC+, plus these kind of G20 energy producers, the problem is if they doubled down and let's say they take this 9.75 OPEC kind of cut and they went to 18 million, let's say, and that previous discussions we had about supply and demand, that definitely then brings down the supply side. But the problem is, forget supply and demand, the problem is, is where are you going to park this oil? It doesn't address the issue that we were just looking at here, which is Cushing is nearing its full capacity. Whether OPEC cut that or not, that's not going to change that situation. So for me, what I think is quite interesting, and I have heard a couple of big banks talking about this as well, is there could be further turmoil in the oil market to come over the coming weeks, and the June contract could be next to see a similar episode to what we've just seen in a few weeks' time. And I do think that's perhaps quite likely going to be the case, because if you think about it, the demand situation, given the ongoing lockdown we're likely to go through globally as well as in the US, and it's going to be so phased and graduated in that opening up of the economy, there's not going to be a demand bump anytime soon. And so therefore, for me, this exact same situation quite likely might well reoccur when the US Oil Fund, the largest crude ETF, rolls over from June to July, and then the June contract has the same issue. Because at that point as well, we'll probably be in a worse situation from a storage point of view. So hopefully that gives you an overview and makes a little bit more sense. Um, like I said, jump on the YouTube channel. If you go back onto our channel, uh, obviously love it if you subscribe, join our community. But if you just jump back to here, what just happened to oil prices, and you can see Will explaining this, um, and this idea about, you know, what is contango, why is it different from normal backwardation, and all these types of ideas, and why did it happen specifically yesterday. He goes over it, and the great thing is he's got his ladder and you can see the tape moving and as it was all unfolding. So it's a really great piece. So yeah, gonna leave it at that for the moment. Obviously any questions, just, just let me know. But quickly gonna fire through a few other headlines because I want the focus to be on the oil move because I think that warrants, uh, warranted a bit more of an in-depth explanation. The other thing that a couple people have mentioned is Kim Jong-un. I've already kind of given you my top-level thoughts about how important I think this is, basically the succession risk is what people are a little bit nervous about. The US is seeking details about Kim Jong-un's health after receiving information that the North Korean leader was in critical condition after undergoing cardiovascular surgery last week. He hasn't been seen, I think his number of public appearances has been down, he hadn't been seen for a number of weeks and so on and so forth. The KOSPI in South Korea was down overnight, I think it was down about 3%, so a little bit of a reaction there in the local market. As well. Um, other things, IBM, um, they came out, they're one of the biggest companies to have reported so far in this season, uh, post the banks that we saw last week. Their shares were down about 3% in the aftermarket reaction. They're about down 10% on the year, essentially a drop in first quarter revenues. They pulled its profit forecast for the year. So again, it's kind of reality of the situation, I guess, at this present point in time. On that point, uh, of earnings, I know it's a bit small, so let me just talk you through it. There are a few things we're looking out for today on that side. So in chronological order, some of the bigger companies to look out for ahead of the opening bell: Coca-Cola, they'll just be ahead of midday in London, so just ahead of 7 AM if you're in New York. You've got Emerson Electric, Philip Morris, Lockheed Martin. They're probably the bigger names coming out. Pre-market, and then after market, probably one that normally captures a lot of the headlines because generally it sees quite high price movement in the after market hours is Netflix. Netflix, they're going to be coming out and reporting after the closing bell, their expected quarterly EPS at $1.64. Quite, quite amazing really. Netflix market capitalization these days is just under $200 billion. Uh, that's about the same size as Coca-Cola, which is pretty mind-blowing when you think about it. But, uh, just the nature of those kinds of, uh, new breed of stocks, I guess, in, in that sense. All right, calendar-wise, what have we got today? Um, this morning a couple of UK numbers already have come out. Again, these are backward-looking, these are February numbers for UK unemployment, so really don't matter at this point. Obviously I've been reading the press this morning getting prepped for this, this kind of briefing, and a lot of people focusing on the OBS and their forecasting about the variants we could see with second quarter growth in the UK, and it's going to be pretty diabolical like this, like what we're going to see in the US. Multiple double-digit percentage losses for Q2 is going to soon become a reality. But from an unemployment situation, the numbers this morning of February, so it's not going to really contain the impact that we're looking for to really get a better sense of how bad the situation is going to be. We get the ZEW economic sentiment reading, generally quite interesting from Germany, but we've already, you know, we kind of focused on IFO. The ZEW is the analyst and economist outlook over the next 6 months. Could be something to just see how basically how bearish people's view has become, but how market moving, I'd say, probably to a lesser extent. And then in the US session, not a great deal going on, to be quite frank. I mean, if, if you're trading the loonie, you've got CAD retail sales, but pretty quiet on the US front. Existing home sales, you've got the weekly oil inventory levels, of course. And this is kind of, again, has been something which has only made the situation worse and led to the event which we had yesterday. Because, you know, if you've been tracking those inventory numbers which come out week to week, obviously from the DOE and the API, we've been seeing these double-digit sizable builds in the headline crude number. And again, that just perpetuates this problem that we have at the moment, as we've just discussed. Um, so that, that is really it. I don't need to really go much more than that, I don't think. So I'm going to keep it brief. Hopefully the oil explanation helps. As I said, if there's any questions, just let me know. Um, and yeah, I wish you all a great day ahead. Alright guys, take care.