Right now, we have a “467 million barrels of financial “get me out of here” taking place in the WTI June contract. After seeing what happened to the WTI May contract on Monday (traded down to minus $40/bl) most everyone with a long position in the WTI June contract are now most likely heading for the door if they can. This is the burning down of long oil ETFs which are holding the lion’s share of the long positions in the WTI June contract. Yesterday there was an exit of 115 million barrels from the June contract leaving 467 million barrels to go. The intense sell-off in the WTI June contract is dragging down the Brent June contract.
Most ETF’s have very strict rules describing how they should place investors money. Mostly it is placed in the first or the second contract and rolled forward according to explicit rules as time passes. I.e. the ETF’s are mostly rule-based, and it doesn’t matter what the managers of the oil ETFs think about oil one way or the other.
The next major roll from June to July is from May 5 to 8. The biggest of these ETFs, The US Oil fund (USO) has now however decided to change its rules and fully exit the WTI June contract of which it held 137 million barrels of on Monday.
Monday’s price event in the WTI May contract shocked the market into understanding what can/will happen to oil prices the moment inventories reach capacity: Price collapse. Not necessarily down to negative prices as we saw on Monday, but definitely price collapse.
WTI and Brent crude oil prices are much more strongly tied together a little bit out on the curve like June. As investors are now fleeing the WTI June contract with an intense selling pressure as a result this selling pressure is rubbing off on the Brent June contract as well. Much more so than when the selling pressure was focused on the May WTI contract at the very front of the curve as was the case on Monday. But now the Brent June is dragged down along with the WTI June contract.
The Brent contract is however not at all land-locked in the same way as the WTI contract which is price off the inland point of Cushing Oklahoma. Physical Brent crude can easily flow across the world and utilize any remaining opening in storage capacity. Either onshore or floating.
The Brent crude oil benchmark is thus much less vulnerable for the kind of events which unfolded on Monday for the WTI May contract. Inventories are none the less filling up around the world. Very Large Crude Carriers (VLCCs) are reported to sail around at sea with no buyers carrying crude from Saudi Arabia. So even the seaborne market is starting to saturate, and it is gradually becoming more difficult to even place Brent crude cargoes into the seaborne market. As a reflection of this Saudi Arabia is now discounting its oil versus both Brent crude and the Dubai crude marker at the steepest discount ever.
A lot of the remaining open position in the WTI June contract is held by long oil ETFs which cannot exit at free will and have to follow explicit rolling rules. Thus, we won’t get an all-out exit of the remaining 467 million barrels of open positions right away. But investors holding these ETFs can take exit and force the ETFs to take exit from the WTI June contract.
Brent crude for average delivery in 2021 traded all the way down to $34.5/bl today but is now back up at $36/bl again. Our standing recommendation has been to buy oil and oil products for 2021 delivery when these forward prices reach ball-park $35/bl. We still hold that view even if there is definitely going to be more turmoil ahead.