OIL MARKET WEEK AHEAD Will crude drop below zero again

The markets have been very enthusiastic over the last few days about how the worst of the decline in oil prices is now over, how the supply surplus in the US market is beginning to clear as states reopen, and how the belo- zero prices seen at the end of April are a thing of the past. While there is some substance to the rebalancing of market story, the risks are far from over, particularly as many oil tankers off the US coast have yet to be unloaded.

Departing from its usual restrained norm, the CFTC poured cold water over the market exuberance, warning brokers, exchanges and clearing houses to be ready for crude oil prices to move yet again into negative territory. Obviously expecting a certain amount of turmoil before the WTI June contract expires on 19 May, the CFTC asked exchanges to monitor the markets and to use their emergency authority if needed to suspend trading if a contract becomes disorderly. Monday will be the highest risk day for volatility given that oil prices have risen 11% in the course of last week.

Russia, Brazil and the virus

Over the last ten days Russia and Brazil have become the new hotbeds of coronavirus with cases in Russia rising by around 10,000 per day and Brazil seeing daily increases of almost 14,000. Both economies will emerge ravaged by virus and if anything, will be tempted to pump more oil to plug income gaps. Russia has been in tight lockdown for roughly the same period of time as the US and Europe but has slowly started reopening this week and the damage to its manufacturing has been on a similar scale as in the other two regions. In April its manufacturing PMI dropped to a record low of 31.3 while services PMI sank to 12.2.

For the moment Brazil has a smaller number of cases than Russia but unfortunately a galloping death toll of over 800 per day. While Russia’s oil output will technically be constrained by an agreement with Saudi Arabia, its usual compliance rate of around 80% may end up slipping. There are no such constraints on Brazil which in January decided not to join OPEC exactly for that reason, to be able expand production at will.

Brazilian exports of crude oil:

Source: Trading Economics

The opposite of lockstep

The American Petroleum Institute (API) oil inventory data published on Tuesdays and similar data from the Energy Information Administration (EIA) on Wednesdays each week typically move in lockstep, reflecting the weekly change in US demand trends, but that correlation diverged last week. The sudden disparity between the non-governmental API and official government data provided by the EIA has left investors wondering which of the two is showing the real demand picture. Given that oil companies are required to report their inventories to the EIA while providing information to API is optional, markets tend to place a greater emphasis on the EIA’s data. The disconnect could create some confusion next week, unless the two sets of data move back into sync.