Since this morning I immediately noticed on my monitors a strong oil drop that does not seem to want to stop.
The May contract for WTI futures was down 30%, which has not been seen since March 4, 1999. What’s going on with oil?
For starters, the world’s largest oil producers such as Saudi Arabia and Russia are decreasing production by 9.7 million barrels per day, because there is a sharp slowdown due to coronavirus. If people are stuck at home, so many industries are clearly closed travel are few so there is an oversupply of oil, in America extraction activity has been reduced but the main problem is storage.
I open a parenthesis when you look at the futures quotes you will see WTI that is the American while Brent is listed on the London market, the differences are in the quality of oil and the extraction process.
As mentioned earlier, the current fall in oil prices lies in the storage of barrels, since there is no longer demand for oil companies no longer knowing where to place barrels. In a short time, oil producers could be in a position to pay the buyers 2 dollars per barrel because storage’s cost is greater than the extraction cost. You may have heard of the market in contango because there is more supply than demand as in our case, on a chart the forward curve has shorter maturity prices lower than the furthest ones.
Currently there is a sharp drop in the May futures contract compared to june, spot prices are weak due to the collapse in demand and lack of places to store oil barrels.
I answer to those who have been writing to me for days if it is time to invest:
yes, if you think the economy will recover soon, if you know futures market and you can deal emotionally with volatility
no if you don’t know the futures market because it’s a bit more complex than buying shares or bonds so you could lose a lot of money in a very short time
