What Caused Oil Prices To Turn Negative?

<h2>COVID-19 Creating Historic Market Conditions</h2>
<p>The COVID-19 crisis which has dominated both financial and mainstream news flows this year has created unprecedented conditions in both people’s lives and in financial markets. With central bank’s launching themselves into fresh rounds of easing in a bid to help support the global economy, the Fed has taken the unprecedented step of running unlimited QE along with announcing that not only will it be purchasing corporate bonds for the first time, but also junk bonds within that category.</p>
<p>The need for such drastic measures can be seen clearly. China suffered its first ever quarterly contraction in GDP over Q1 with growth falling 6.8% as a result of the loss of activity caused by the lock-downs in place there over much of the quarter. The Bank of Canada was forced to abandon its status as the only of the G10 central banks not to employ QE in the wake of the 2008/2009 GFC as it too launched an asset purchases program last month, which it has already extended this month. We are now seeing yet more “firsts” created by the massive economic disruption caused by this virus.</p>
<h2>Negative Plunge</h2>
<p>US benchmark oil prices sank into negative territory this week for the first time in history. This wasn’t just a brief dip below zero either, prices bottomed out on Monday at minus £37.63 a barrel. The oil market has been in free fall this year as a result of the residual damage caused by the US/China trade war and a growing lack of demand globally. All of this downward pressure has been amplified by the COVID lock-downs and global drop in activity, culminating in a more than 100% drop on Monday.</p>
<p><em><strong>How come prices fell on Monday?</strong></em></p>
<p>The reason for the historic price plunge on Monday was due to a technical anomaly caused by the way in which oil futures trade. With the oil futures contracts for May delivery set to expire on April 21^st this was the deadline for traders to either close out their positions or end up taking delivery of the oil. The third option with these contracts is to roll the position into another futures contract for the following month. Despite the fact that oil prices were plunging, holders of the contract were fleeing into the next month’s contract at record numbers.</p>
<p>This gives us some crucial insight into the state of the oil market currently reflecting the fact that, firstly; demand for physical oil has been obliterated and, secondly; storage capacity has become a major issue in turning away oil receivables.</p>
<h2>Oil Demand Cratering, Production Rising</h2>
<p>With oil demand dropping off a cliff over the last six months, the price of oil has been steadily falling. However, in the US for example, oil production has still been climbing steadily leading to a massive build up in inventor levels there meaning tat many sites are now nearing max capacity in terms of the amount of oil they can hold, further subduing the price.</p>
<p>This situation was exacerbated since the start of March in the wake of the failed OPEC deal. With Russia refusing to agree to further production cuts, Saudi Arabia, the group’s largest producer and de-facto leader made the incredibly unexpected move of flooding the oil market with even greater supply, to depress prices further and force Russia to renegotiate. While OPEC+ has since agreed a deal to cut production by a further 9.7 million barrels per day, it seems as though this might not be enough to help buoy ailing prices.</p>
<p>Coming at a time when demand from all sectors around the world has been totally wiped out due to the ongoing lock-downs in place around the globe, the oil market collapsed under its own weight and took the record plunge below zero. While the drop below zero was itself the result of a technical quirk in the way these futures contract trade, the reason behind the mass roll into June contracts is a warning sign over the health of the global economy which cannot be ignored.</p>
<h2>Technical Views</h2>
<p><strong>WTI (Bullish above $17.10)</strong></p>
<p>From a technical viewpoint. The recovery rally off the all-time lows in oil has seen price breaking back above the $9.65 1980s lows. While above here, the objective will be a further recovery above the $17.10 level. However, if price cannot reclaim the latter level, expect some consolidation at current prices while the market digests this week’s moves.</p>
<p><img class="aligncenter size-full wp-image-42213" src="http://blog.tickmill.com/wp-content/uploads/2020/04/crude-2.png" alt="" width="1220" height="607" srcset="https://blog.tickmill.com/wp-content/uploads/2020/04/crude-2.png 1220w, https://blog.tickmill.com/wp-content/uploads/2020/04/crude-2-300×149.png 300w, https://blog.tickmill.com/wp-content/uploads/2020/04/crude-2-1024×509.png 1024w, https://blog.tickmill.com/wp-content/uploads/2020/04/crude-2-768×382.png 768w" sizes="(max-width: 1220px) 100vw, 1220px" /></p>
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