• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Futures

The Physical Oil Market Is in Dire Straits

The May oil futures contract is in free fall as the excessive supply of crude amid diminished demand threatens to create ongoing chaos for the market.
By MALEEHA BENGALI
Apr 20, 2020 | 08:48 AM EDT
Stocks quotes in this article: PAA, EPD

As the May oil futures contract goes into expiration this Tuesday, April 21, it is down another 36% here on Monday, trading at less than $12 per barrel as of publication of this piece. Meanwhile, the next-month June contract was trading at around $23 a barrel, down nearly 23% since last week following the OPEC+ deal in which participants agreed to cut 9.7 million barrels per day in oil production across OPEC and Russia.

The front-month contract to the second month is trading at a spread of about $10 a barrel, which is referred to as contango when the futures price is above the spot price and means the physical market is in a total state of chaos.

The oil commodity contract is a physically settled contract. In laymen's terms, that means anyone holding the contract will be seeking physical delivery on expiration. The only problem is that on the day of expiration nobody wants that oil as there is simply just too much of it and no space to store it.

It is not feasible to store oil in your backyard, although given the level of contango the 40% trade for one month seems mouth-watering. As long as there is no physical buyer for the oil expiring in May, that price can keep falling until there is a buyer. That is how commodities work. For good or bad, it is driven by actual physical inventory. Fortunately, the Fed cannot manipulate this market, but we have other characters who try to do so but fail eventually.

One may ask if this is a temporary technical failure, and that perhaps we should ignore the price of oil today as the next contract, the June contract, will become live in few days. That is not the case, because the problems existing now still will be there by the time the June contract expires sometime in the middle of May.

The reality is that front-month oil is trading $23 a barrel for West Texas Intermediate (WTI) crude and that each day the oil price averages here the oil companies will face that price for their inventories. This has not been factored into the earnings for the oil majors or some of the more levered exploration-and-production companies.

Most observers are assuming this is just a temporary blip and prices will rally as soon as we are past April. The equity market can take that lead with the Federal Reserve buying (a.k.a. manipulating) every asset class, but the oil market needs actual physical demand.

Even after the global rate of Covid-19 infections peaks and lockdowns end in some countries in May, will life and travel return to normal immediately? Not at all. This is what needs to be priced by the equity markets until a vaccine is developed and demand normalizes at a new lower level, because there still is just too much oil. The production cuts are just buying time ahead of an eventuality. We need to see more and more wells permanently shut down -- not just talked about, but closed.

Commodity prices can trade negatively; it's very rare, but some situations deem it possible given physical dislocations. In Texas there are some landlocked crudes, meaning physical oil is stuck in a region unable to be transported out to be delivered elsewhere. That situation chokes the delivery point, causing prices to collapse.

A subsidiary of Plains All American Pipeline (PAA) bid just $2 a barrel for South Texas Sour on Friday, while Enterprise Products Partners LP (EPD) offered $4.12 a barrel for Upper Texas Gulf Coast crude this week, according to Bloomberg. WTI crude is a landlocked oil. Brent oil prices are more reliable as a global benchmark for oil given it is seaborne and transportable globally in the world if there is demand.

So where is all this extra oil going? Oil tanker shipping vessels are now used for floating storage as an alternative source to hold the oil until prices recover. As of today, storage on vessels has reached 160 million barrels on super tankers called VLCCs that can carry by to 2 million barrels each. The last time floating storage reached these levels was 2009, and now smaller and product vessels are being used to store all this extra oil, too. Because of the contango, traders can buy oil today, store it and hope to flip it at the forward price, if they can get storage economically. It is a game of numbers.

Until that oil can find a home, prices will need to keep falling until more and more producers are forced to involuntarily close production permanently. Once the excess supply is soaked up, prices can stabilize. Recovery is another matter altogether, and that requires actual demand picking up more than what is already available.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Bengali had no positions in the stocks mentioned.

TAGS: Futures | Investing | Oil | Energy | Real Money |

More from Futures

I Don't See Greener Pastures Ahead for Cattle Futures

Carley Garner
Jun 8, 2023 2:39 PM EDT

As cattle futures have stampeded to a new all-time high, I'm getting flashbacks -- here's why and how to position your portfolio.

Fierce Friday, Nasdaq Accelerates, S&P Cracks Resistance, Mixed Jobs, Week Ahead

Stephen Guilfoyle
Jun 5, 2023 6:56 AM EDT

The sudden appearance of a weaker labor market is likely what's causing the Fed to be considering a 'skip' this month, giving time for the economy on Main Street, USA to catch up to where the Fed has been on policy.

Neutral Is a Position, and Las Vegas IS an Indicator

Carley Garner
May 31, 2023 3:30 PM EDT

When it comes to markets, positions are to be courted, not married.

EQT Could Rally on Latest Natural Gas Prices

Bruce Kamich
May 18, 2023 9:16 AM EDT

Let's check the charts and indicators.

Copper Looks Bent Out of Shape Now, but Will Charge Ahead Soon Enough

Carley Garner
May 16, 2023 2:00 PM EDT

Here's why you shouldn't insulate yourself from a trade in this critical metal.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:45 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    Bulls, Bears, and Market Predictions
  • 11:31 AM EDT CHRIS VERSACE

    We're Adding to a Position on Weakness

    Check out what's going on in the Action Alerts PLU...
  • 07:19 PM EDT CHRIS VERSACE

    AAP Podcast: This Company Is Not Going 'Solo'

    Listen in as I talk with the very diversified Solo...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login