Oil: The Digital & Highly Expensive Version of Pass-the-Parcel

In the current climate we live in a time of unprecedented firsts. The first time in 258 years New York cancelled its St. Patrick’s Day Parade. The first time Wimbledon has been cancelled since WWII. Then yesterday, U.S. Oil prices fell below zero for the first time ever. The latter will not be the last of these firsts but it surely one of the most shocking.

During the global COVID-19 pandemic the demand for Crude Oil has dropped by around a third resulting in the sector rapidly exhausting its ability to store the commodity. The direct result of this was yesterday’s enormous drop in WTI (West Texas Intermediate) futures that closed the day at -$37.63 per barrel. At one point the price was down 310.45% on the day.

The massive swing in price is partly down to a market technicality as the WTI future expires today. When the future expires the holder will have the obligation to take delivery of the oil. With storage at almost full capacity this is basically impossible. What ensued was a digital and highly expensive form of the child's party game of pass the parcel. However, unlike the children no trader wants to be left holding the 'present'.

Things may improve in the short-term - the future of oil prices appears to be more stable as June's contracts were trading at $20.20 a barrel, down a meagre 1.1%. Additionally, the global benchmark Brent Crude was trading at $22.35 per barrel for June delivery. Market experts however aren't as optimistic on an expected bounce back. Tai Hui, chief Asia market strategist at JPMorgan Asset Management, stated “The Covid-induced evaporation in demand will keep the oil market under pressure,” and “the world is going to be awash in oil for some time”.

In the US there have been calls for the government to intervene in the current crisis with ‘distract’ measures, such as paying producers to keep oil in the ground, whilst others are calling for an import tariff. It appears that the government remains wary of trying to manipulate the market as they have a history of failing to understand what the correct prices are.

The two key oil market manipulators are Russia’s Vladimir Putin and Saudi Arabia’s Mohammed bin Salman. They have pledged to produce 9.7m less barrels per day (bpd) for May and June. This is in a bid to help stop price crashes and ease storage pressures. These two power houses appear to have a diminishing influence on the market and seem unable to counter the lack of demand’s effect on price.

With a decreasing control of the market from the Middle East there is potential for more market manipulation in the west where companies look to influence the market in the same manner as Arcadia Petroleum Ltd and Panon Energy have previously done. Arcadia created an artificial shortage and used futures and options to control prices as they rose, cashing in for huge profits. As the crisis continues will companies fill the need to go as far as market manipulation to seek profits and force oil price rises.

…the one certainty during this current pandemic is the uncertainty of the price of oil.


By Bailey Goodman, Junior Consultant at Lysis Group