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How soon will Brent cover the gap?

With price wars between Saudi and Russia, to negative oil prices all during the Coronavirus, Oil has had one of its most turbulent year to date. However, deep cuts from OPEC and a resurgence in oil demand has helped oil prices stabilize around the $40 mark – with Brent peaking just under $43.929, just short of the psychological $44 mark. However, this is shy of the $45.5 mark required to close the gap pre-coronavirus.

WTI in Blue, Brent in Orange

Brent's losses are lower to its American Counterpart

It is interesting to note that Brent Crude is down 2.29% today; however, the American equivalent, WTI Crude, is down 3.1% today. This shows that the market is slowly, but finally, pricing in risk for different macro conditions. It makes sense that WTI, the grade of oil many American companies and citizens depend on, is lower due to Coronavirus cases continuing to climb in many large fuel consuming states such as California, Texas, and Florida. However, Brent Crude, the oil grade used worldwide, is down slightly due to the majority of the global population slowly emerging out of lockdown after relatively successful lockdown measures.

With oil shale companies taking on vast amounts of debt only serviceable with oil prices being at $60, low oil prices have been devastating for US shale producers. This is on Whiting Petroleum and Chesapeake energy filing for bankruptcy after they could not service their debt. Andy Lipow, president of Huston based consulting firm Lipow Oil Associates, stated that he does not “think $40 oil is enough to turn the shale industry” and that “the price is not enough to cover all the debt and costs that have been incurred during the boom.”

Bullish or Bearish on Brent?

However, not everyone is so bearish on the Black Gold. Christyan Malek, JP Morgan’s leading oil equities analyst state that there could be a supply gap around 2022 from delayed infrastructure projects and restricted supply, stating that “Covid-19 has increased the chances of much higher prices,” and that “the next oil supercycle” is on its way.

This pattern of market pricing in risk is not only limited to the oil markets. Today the NASDAQ closed higher, while the Dow Jones and the SP500 both closed lower as tech stocks and their balance sheets show their resilience in the Coronavirus era compared to more traditional businesses.

For now, however, we are likely to see oil range between the $40-$43 marks and $38-$40 marks for Brent and WTI respectively until positive signs show that oil demand is entirely on the road to recovery.

Oil futures lower on concerns over capacity and negative prices

It has been a bloody couple of weeks for the oil markets. A price war between Saudi and Russia, a depression in demand due to the coronavirus and a slow reaction from oil producers in cutting supply, has crushed the price of oil. Add to that a sprinkle of fundamental supply and demand forces hitting the futures market for oil, and you get the unprecedented price of -$37.63 for a barrel of WTI.

Futures were down today to a low of $10.07 and $19.99 for WTI and Brent, respectively. Concerns over negative prices repeating the next month loom for WTI as we edge closer to the expiry date for July, with the spread between WTI and Brent edging higher. But it is not all good news for Brent. With inventories across the world increasing, filling up excess capacity, negative prices for Brent are not out of the question. However, the odds are stacked up against WTI – with futures being physically settled in Cushing, Oklahoma, and storage being primarily onshore. This is in comparison to Brent with futures being settled in cash alongside the mobility being able to be stored on carrier vessels offshore.

Energy Aspects Chief Oil Analyst Amrita Sen told Bloomberg that the supply recovery is likely to lag the rise in demand for oil, giving a glimmer of hope for the battered commodity. Furthermore, Major OPEC countries Saudi Arabia, Kuwait, Algeria, and Nigeria have already started cutting supply ahead of agreed May 1st start date for the historical deal for where OPEC countries would collectively cut around 10% of the supply of oil to combat the effects of the coronavirus on the price of oil. With countries slowly getting out of lockdown, the demand for refined oil products is predicted to creep up in the following months. Nevertheless, significant countries such as the United States are still getting hammered by the effects of the coronavirus, which may stagger that increase in demand for refined oil products across the world.

This uncertainty with supply and demand, alongside capacity concerns and a repeat the negative prices last month, is being reflected in the drop in price today. But the fact that the price is not negative today may be considered as a good sign as it can be interpreted as traders selling their positions now so they do not experience what happened last week with oil, relieving the selling pressure come expiry for the June oil contracts for WTI.

Oil Traders need to be prepared for volatile and violent swings as supply and demand forces clash it out in the next couple of weeks.