US West Texas Intermediate WTI Oil has sunk to $11.01 per barrel, the lowest level since 1982.
Oil has been under pressure throughout the COVID-19crisis and today’s selloff marks a new milestone for 2020’s decline.
However, while the headline figure of oil falling to $11.01 suggests a shock to global markets, the underlying market dynamics suggests this isn’t the case.
The WTI oil contract priced at $11.01 is the front month May contract which is due to expire on Tuesday.
This means that as of tomorrow, when the May contract expires, WTI prices will be quoted from the June contract. The June contract is trading at $22, around double the price of the May contract.
The sharp drop in WTI oil prices to record lows today is more a case of futures traders exiting positions in the May contract in a low volume market to avoid taking physical delivery.
Each month trader’s shift to the next month along the contract curve near the expiry of the front month as this is where the market liquidity naturally shifts to as traders exit positions to avoid holding a position when the contract expires.
So while WTI is printing the lowest level since 1982, this isn’t a true reflection of the oil market which will be quoted at $22 as of tomorrow.
Despite today’s price largely being a consequence of market dynamics and the contract expiring, it makes the price no less remarkable and is a sign that oil traders really don’t want to be taking delivery of American oil in the current market.
The IEA have recently issued a report that highlighted a severe lack of demand could lead to storage facilities becoming full.
This would undoubtedly be disastrous for the price of oil and some analysts have said the price of oil could even turn negative as oil producers have to pay people to take it away.