Back on March 17, as oil was plunging to levels not seen since the presidency of George W. Bush, we published a shocking forecast by Mizuho’s Paul Sankey who stunned oil traders with what at the time was an insane prediction: "crude prices could go negative – yes, as in you would be paid to take delivery."
According to Sankey, much of the US 4MM bpd in crude exports will be curtailed as prices fall and tanker rates soar. And with US storage roughly 50% full, and able to take another 135MM bbl more, assuming a build rate of 2MM b/d, the US can add 14MM bbl/week for 10 weeks until full.
As a result, there is a now race between filling storage and negative pricing "unless U.S. decline rates can outpace inventory builds, which we very much doubt."
We concluded our own assessment by saying that "despite its low price, oil may still have at least 100% (or more) to drop."
This was proven correct. What also proven correct, just one month later, was Sankey's apocryphal forecast when the May WTI contract crashed to negative $40 when it "suddenly" emerged that there is no place to store the hundreds of thousands of barrels of deliverable oil (held mostly by the USO ETF), something we had cautioned about… repeatedly.
Having been proven correct, was Sankey content and does he now think that Monday's insane price action ws the bottom?
Oh no, not even close, because while sooner or later oil will soar – just as soon as the oil market shifts to a demand imbalance after millions of bpd in production has been indefinitely shut down and the global economy start to recover – in the meantime there is much more pain to come.
"We have clearly gone to a full-scale, day-to-day market management crisis,” said Paul Sankey taking a modest victory lap, and then, talking to Bloomberg, he went a step further on Tuesday, saying: “Will we hit negative $100 a barrel next month? Quite possibly."
The reason: the (lack of) oil storage situation is going from bad to worse – something Reuters details so vividly in "Ships, trains, caves: Oil traders chase storage space in world awash with fuel" – as can be seen in the chart below…
… with Bloomberg adding that "it could be a matter of weeks before there’s no more room to store crude, an event called in industry parlance the "tank tops." The result would be oil prices near zero in many parts of the world, and in some cases they could go negative."
“We are on a path to global tank tops in late May or early June,” said Florian Thaler at Oilx, a research firm which uses the satellite data.
"It’s something that’s never happened before" adds Bloomberg, although clearly there is a bit of a delay there because it just happened on Monday, although that was mostly a special case – the confluence of the USO ETF having been loaded with too much May deliverable which it had to shift to future months. However, by sending the price of the May WTI deliverable sharply negative if only for one day, it demonstrated what will happen to the global oil market unless i) the storage problem is not resolved in the next few weeks or ii) the global economy fails to reopen in the near future.
Indeed, as Bloomberg notes, "the chaos in the American oil market on Monday could foreshadow what happens globally, if other tanks start to fill up. It also shows the market will likely anticipate peak storage, rather than wait to plunge when the limit is breached. Some oil producers have now re-drafted their contracts to stop their prices from going negative."
Somehow we doubt that will help much, especially now that the CME has allowed not only oil future to trade negative but permitted negative option strikes.
Worse, the world of negative prices doesn’t have a floor, and after this week, "anything is possible" writes Bloomberg's Javier Blas. One certainty is that the latest satellite imaging data shows a massive glut. There are 50 million barrels of crude are going into storage every week, enough to fuel Germany, France, Italy, Spain, and the U.K. combined.
Take for example India, where refiners have filled 95% of fuel storage capacity, according to officials at three state-owned processors. Nigeria will cut production because it has no place to keep crude, Mele Kyari, the chief of state oil company NNPC told a local newspaper.
Meanwhile, with zero demand for gasoline as most economies remain in lock-down mode, oil refiners aren’t buying crude, and yet heavily levered producers – desperate to keep the cash flow stream open, have kept on pumping. Even a few dollars is better than none for indebted companies. For now all the newly pumped oil has nowhere to go but into storage. And it is the storage that is about to tap out.
Making matters even worse, Bloomberg notes that satellite data might even be underestimating how much room is actually available. A lot of empty space has already been rented out by traders.
“We can have negative prices, and very negative prices,” said Pierre Andurand, the founder of the eponymous oil hedge fund, adding that oil is a “dangerous market to trade in right now.”
From high up, the oil market looks like a global, highly interconnected system. But the reality is that the market is a collection of small and big islands, all connected via thin links. What matters is not when the world’s total storage is full, but when each of those islands, or regional hubs, reaches capacity — or threatens to. It's also why following the Sankey report, Goldman came out with its own research warning that "landlocked" oil such as WTI or Canadian oil, would likely slide negative even as tanker accessible Brent remains well bid.
For the American market, it all comes down to Cushing, Oklahoma, the delivery point of the WTI oil futures contract. The town, which calles itself the “pipeline crossroads of the world,” hosts a dozen tank farms, big enough to hold nearly 80 million barrels. When the WTI contract expires, traders who are long receive oil in Cushing and have to find a place to store the barrels or ship them out. Being short the contract means you have to deliver the oil.
This is what catalyzed the Monday oil price crash: traders who owned the May WTI contract rushed to get out of the contract – the opposite of a short squeeze – before expiry as they didn’t have tanks to store the oil. At the worst moment, someone paid $40.32 a barrel to avoid taking delivery of oil.
Confirming the deliverable insanity, Bloomberg points out that in the physical oil market, traders bid barrels at even larger negative prices with Plains All American Pipelines – one of the main US oil shippers – asking producers of a crude stream called Eastern Kansas Common to pay it $55.05 a barrel if they wanted to sell.
“Onshore storage is very limited,” said Ben Luckock, co-head of oil trading at Trafigura Group, a major commodity merchant.
To be sure, there are a few spots with oil storage space left – but those tool will fill up soon – including Rotterdam, a refining hub for Western Europe, several islands in the Caribbean and Singapore, which is best known for photos such as this one from 2016 when the world had its last near-death storage experience and millions of barrels of oil were parked off Singapore.
Yet while tankers into temporary floating storage facilities, they offer limited relief, especially with some 250MM barrels now stored at sea. In the world of storage, Rotterdam-based Royal Vopak NV is the biggest. Its executives say there’s a global hunt already underway to secure more tanks. According to Chief Financial Officer Gerard Paulides, “the available capacity on the oil side is almost completely sold out.”