Commodities Daily - April 21, 2020

> US oil enters freefall as it finds no buyers with anywhere to store it amid a genuine lack of demand. Unless we see a stock draw in June as lockdowns are eased, we are likely to see a repeat of this situation at expiry for the next few months. Brent could suffer the same fate, though for this to happen, global storage (Brent is a global benchmark, while WTI is only the US benchmark) would need to reach its limit, which is a possibility given the current rate of inventory buildups. As the current front-month Brent June contract nears expiry on Thursday next week, it will inevitably grind toward the spot price, which currently stands close to $15/bbl. We see the next technical support for the Brent June contract at $21.6/bbl.US OIL ENTERS FREEFALL AS IT FINDS NO BUYERS WITH ANYWHERE TO STORE IT AMID A GENUINE LACK OF DEMANDFront-month Brent (for June delivery) was trading near $28/bbl yesterday morning but began to slide and eventually settled at $25.57/bbl, $2.51/bbl below the previous settlement. This morning, it plummeted toward $23.5/bbl after breaking the technical support level at $25.1/bbl that we outlined yesterday as a near-term target. The US oil market has grabbed the headlines at the start of this week. The WTI May contract, which is expiring soon, yesterday plunged into negative territory to as low as -$40/bbl, while the most active contract - WTI for June delivery - was trading in positive territory near $20.5/bbl. As the futures contract nears expiry, it is converging with spot prices, which due to the lack of demand have been trading at vast discounts to futures for more than a month now. One factor at play here is genuine market forces, and the same might apply to the current Brent front-month contract when it nears expiry later this month (although an abrupt bullish development of some description could of course disrupt this pattern). Of course, there were numerous factors at play for the WTI May contract to settle at an unprecedented -$37.63/bbl yesterday. Such an abrupt price move clearly has to have no buyers and only sellers desperately trying to exchange their oil for money or at the very least to get rid of it at any cost. Cushing in Oklahoma is a major trading hub for crude oil and has been the delivery point for crude contracts and therefore the price settlement point for WTI on NYMEX for decades. Cushing has around 73 mln bbl of working storage capacity, leaving only 23 mln bbl of available storage if the latest EIA inventory data is anything to go by. However, plummeting oil demand amid still-plentiful supply are likely to force Cushing stocks to top out by early May, rendering the hub physically constrained. Thus all the usual physical market buyers have left the market, as they simply have nowhere to store crude now. Refiners do not need the crude either as refined product demand has tumbled due to the lockdowns. The current market conditions imply that crude has to reach a price to stop barrels flowing into the hub, meaning that production shut-ins need to happen to enable this. Furthermore, in the real world it is more economic for a producer to pay someone to take the crude rather than to shut its well given the high costs associated with closing a well. The other factor at play is of course the liquidity of the futures, which falls dramatically as they near expiry. Low liquidity is usually a factor of elevated price volatility. Unless we see a stock draw in June as lockdowns are eased, we are likely to see a repeat of this situation at expiry for the next few months. Brent could suffer the same fate, though for this to happen, global storage (Brent is a global benchmark, while WTI is only the US benchmark) would need to reach its limit, which is a possibility given the current rate of inventory buildups. As the current front-month Brent June contract nears expiry on Thursday next week, it will inevitably grind toward the spot price, which currently stands close to $15/bbl. We see the next technical support for the Brent June contract at $21.6/