Negative oil prices could come knocking again

Could oil prices head into negative territory again? The US Commodity Futures Trading Commission certainly thinks so, warning that prices could collapse again when the West Texas Intermediate (WTI) futures contract for June expires next Tuesday.

The US government body says it is issuing this advisory “in the wake of unusually high volatility and negative pricing experienced in the May 2020 physically-delivered WTI contract, and related reference contracts, on April 20”.

The WTI is currently trading at $US26.62 ($41.19) per barrel while the international Brent Crude benchmark is at $US30.36 per barrel.

In mid-April, May futures contracts for the WTI crude benchmark hit negative values due to a lack of storage options at Cushing, Oklahoma and a reduction in oil demand, leading traders to take a loss to sell their oil rather than struggling to find storage space.

OPEC has also downgraded its demand forecast for 2020 by a third, or just over 9 million barrels per day, up from its previous prediction of a 6.84-million-barrel-per-day drop.

However, Exness market analyst Michael Stark believes that there is some positivity in the oil market as some European countries start to ease their lockdowns, though ongoing strong gains are unlikely given the much weaker forecasts for demand.

“The current contango exhibited by NYMEX’s futures on WTI suggests a degree of recovery in the second half of the year. There’s basically no incentive now for anybody to expand production, so logically the supply glut will gradually improve,” he said.

“There’s no indication yet of a second wave of COVID-19 having a dramatic effect on crude, but time will tell: short-term money generally dominates for oil as other instruments in the current circumstances.”

The International Energy Agency has also forecast that global stockpiles will be lower in the second half of 2020.

US crude inventories have also fallen for the first time in 15 weeks, with the Energy Information Administration saying the US crude stockpiles had fallen 745,000 barrels to 531.5 million barrels in the week to May 8.