M“Oil market chaos” was the title of a conference call in which Eugen Weinberg, oil specialist at Commerzbank, wanted to bring business partners from all over the world closer to the extraordinary development on the American oil market on Thursday.
Negative prices on the oil market, that was a very special situation, was his message, which traders, stock exchanges and banks all over the world would have to adjust to – and which could lead to unforeseen difficulties. Nevertheless, Weinberg believes that by the end of the year everything will have calmed down somewhat and the oil price for the North Sea Brent will be back at $ 40 a barrel (barrel of 159 liters).
“The physical market participants or hedge funds were not primarily responsible for the turmoil surrounding the American oil price on Monday,” says Weinberg, “but above all partially automatic actions of the investment products for private investors and forced liquidations”. In the past two to three weeks, there have been large inflows into exchange-traded index funds (ETF), exchange-traded commodities (ETC) and certificates on oil from private investors.
Treacherous roll losses
Many of them would probably not have understood that, unlike the stock market, such securities on oil would not automatically benefit from the so-called roll losses if the oil price rose. “Where there is oil, there is not necessarily oil in it,” said Weinberg.
Oil on the futures market is traded with contracts that regulate the purchase of oil at a time. Securities for investors build on this. These contracts expire at some point and can then no longer be terminated. At least for the American West Texas Intermediate (WTI) grade, the contracts cannot then be paid out in cash, but the beneficiary must physically receive the oil.
Since the storage capacities in America are scarce and therefore expensive, nobody wanted that, and the price for the May contract continued to fall. The providers of investor securities on oil, in turn, “roll” these contracts, that is, they sell the expiring ones and buy the new ones. If oil is now much more expensive to trade in June than in May, as was the case at the beginning of the week, the providers of the securities will receive fewer new contracts for the proceeds from the old contracts – so the investor will not benefit, even though the oil price is recovering optically.
“The fact that the oil price has become negative for the first time has huge effects – even if you should not expect that in future, if you need money, you can simply drive to the petrol station instead of the ATM and get money for refueling there too,” said Weinberg.
Brent price also wobbles
He stated that the Brent price could also slide into the negative. “I think that is less likely for the futures market on Brent because, unlike WTI, contracts can also be paid out in cash,” said Weinberg: “But for the market for physical oil, it is quite possible that the physical prices sometimes become negative if the producer offers a large discount to the Brent oil price. ”Saudi Arabia, for example, offers its European customers a discount of more than $ 10 a barrel for May deliveries. Oil suppliers who have high transport costs are already paying part of the price.
“I expect the oil market to recover in the second half of the year,” said Weinberg. However, it is easier to predict what will happen in six months than what will happen in six minutes. He expects the Brent price to recover to $ 40 by the end of the year, but nothing more. “The price war could continue, and the large stocks are also well filled. “If production surpluses stop this year, around a billion barrels of oil in warehouses and oil tankers are likely to be brought back on the market.”