The price of a barrel fell to its lowest level since 1999. The market dived by more than 10 percent, bringing the price of the May contract to around USD 15. The June series is trading at the level of USD 23.70, and the July series at the level of USD 28.51. This means huge contango in the oil market.
American crude oil reserves, which are stored, among others in Cushing, Oklahoma, fill up to the brim. It is there that the physical delivery of crude oil settled on the basis of futures contracts goes to the central hub. Production is still high with a significant decline in demand. If this storage space ends, and the possibility of increasing oil reserves runs out, producers will again have to limit production. This, in turn, may be associated with the closing of refineries and oil rigs, i.e. also an increase in unemployment. Hence, probably the US could put a lot of pressure on the rapid return of demand for oil, so as not to lead to the collapse of the oil sector. The US government will additionally subsidize companies in this sector to avoid a wave of bankruptcies despite the current lack of profitability.
According to information from the weekend from Evercore ISI, North American exploration and production companies have reduced their budgets by around 36 percent y/y, while international companies cut budgets by 23 percent. Meanwhile, the recent reduction in oil production by 10 million barrels a day may not be enough, as the decline in demand is estimated at 30 million barrels a day.
A significant sell-off on the oil market hit the commodity currencies: the Canadian dollar or the Norwegian krone. These currencies were already under pressure as soon as the OPEC+ agreement fell apart. Today, losses are not as great as then, but the decline in these currencies is noticeable. The USD/NOK exchange rate increased by as much as 0.9 percent today in the morning, and USD/CAD rose 0.6 percent. When trading these currency pairs, it is worth keeping in mind what is happening on the oil market, because for Canada oil accounted for 14 percent the value of all exports, and for Norway, it was as much as 26 percent.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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