USOIL has presented us with a modern day black swan as of yesterday with prices crashing through the floor of $0.00, with the lowest chart reading of $0.01 and contracts reaching roughly -$40 per barrel. For those of you who don’t know what a black swan is, it is an event with the 3 following attributes :
- It lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.
- It carries an extreme impact.
- Lastly, although it’s outlier status, due to human nature we build explanations for its occurrence after the fact ( looking in retrospect ) , making it “explainable and predictable”
In summary, it is an event with rarity, extreme impact and retrospective predictability. Now with prices reaching into the negative seeing some futures contracts of West Texas Crude plummeting to -$37.63 a barrel. Try to rationalise this, if you were to go to a shopping mall, would you expect the stores to pay shoppers to take their goods away?
In this case, we actually have this coming to reality, producers are paying buyers to take their oil. Why? For certain producers it would be devastating and permanently damaging to their business, should they shut down. So it may be cheaper in the long run to pay buyers. This is one of the rarest events in trading history.
Above we have the quarterly chart, as you can see we have the base level low range between $9.75-$10.00 which was absolutely wiped out. As we surpassed the last piece of support provided on the chart, price collapsed below $0.00.
Looking at the daily chart, we see the collapse of the US oil market. There are multiple reasons as to why oil prices reached these unthinkable levels.
Backtracking slightly, we had the Saudi Arabian Prince and Russia’s Vladimir Putin sparking an oil price war rapidly increasing oil supply. This rocked the oil market however adding the pandemic to this produces a devastating concoction. Record volumes of oil were brought into the market causing a collapse in price.
An agreement worked out by OPEC, Russia, Saudi Arabia and the US called for a 10-12% production cut however this hasn’t materialised to the fullest extent. Along with this, lockdown has caused a huge drop in demand with an ever-growing supply.
Saudi Super tankers Oil is still being shipped to Asia and Europe in large quantities and by mid week to the US. With no demand, prices are falling through the floor having traders quite literally looking under the desk for the candle. There is 9 days left till OPEC Plus Agreement however immediate action is needed. In the last 4 days, Russia have added 110,000 barrels to their oil production. The final blow for the oil market was the fact that US oil storage facilities were being filled to maximum capacity with no oil to sell nor places for it to be stored.
By 20:30 last night, WTI contracts reached -$40. Contracts have since expired with the opening price on new contracts around $21.39. This morning we’ve seen price collapse to $11.57 and at the time of writing this article, we see price at $15.50. One thing to note is that we may have a possible oil production reduction agreement as 9 days till the OPEC agreement is too long.
Looking at USDCAD , we can see a bullish rally as oil plummeted. This is due to the fact that Canada receives between 3-8% of their GDP from oil supplies. Canada has announced bond buying of 60 billion Canadian dollars, this is a form of quantitative easing as well as they are looking to change the interest rate according to the oil market collapse. This is highly CAD negative.
Although this is an incredible wealth shift, trade carefully and do not get ahead of yourself as oil spreads and swaps may be extremely volatile as well as price may move rapidly as we get further news developments.