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June Brent Contract Lurches Lower

Published 04/21/2020, 06:07 AM
Updated 07/09/2023, 06:31 AM
LCO
-1.03%
CL
-0.84%

It's only Tuesday, and not only are oil storage tanks reaching the saturation point but so have oil traders. 

There is too much uncertainty in the world at the moment for anyone to have any conviction. Markets are doing some pretty odd twists, with oil being the latest example. It would be easy to write off what happened into expiry, but that might be the problem in itself. 

WTI futures are physically delivered to Cushing, Oklahoma. While there is pipeline capacity to ship it out in the near term, this is fixed, giving oil traders minimal options in terms of what to do with their crude.

The oil price reflects the economic value of oil less than the cost of storing oil. As WTI requires physical delivery and storage is very expensive to access, the cost of storage in May exceeded the economic value of oil in May. So, unless there is some type of coordinated intervention, June could become worthless as well, hence the cries of " timbre" being heard across the oil trading desks around the world as the June contract lurches lower. 

It's somewhat different for Brent, which is a seaborne product that allows traders more flexibility in storage and transport. But is the May WTI delivery fiasco going to be troubling signs of things to come in the entire Oil complex 

One of the key metrics to watch is the shape of the curve. The 12m contango in Brent has widened to nearly $15/bbl this morning; as it veers to March highs, then things will turn mightly ugly again. 

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