Oil Price – Traders Are No Longer In Panic Mode To Find Buyers For Unwanted Oil As Demand Ticks Up



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Oil markets are returning to relative normality, the once yawning gap between the price of an actual physical barrel of oil and futures prices has narrowed sharply.

At its worst in April, a barrel of oil in the North Sea cost $10 less than the price on a Brent oil futures contract, a decade-high gap for the world’s benchmark oil price, according to S&P Global Platts. Now, the gap has shrunk to less than $2 a barrel as the oil market rebalances and traders are no longer in panic mode to find buyers for unwanted crude.

“A few weeks ago, we had armageddon pricing when nobody wanted physical barrels apart from for storage,” said Richard Fullarton, chief investment officer at hedge fund Matilda Capital Management Ltd.

The price of physical oil slipped far below futures prices last month when oil storage ran short and the cost to store crude jumped. The two prices tend to collide ahead of the expiration of futures contracts.

The return to health in the physical oil markets reflects several factors. Oil producers have made large, coordinated cuts in production. China’s economy has restarted and lockdowns in Europe and the U.S. eased, creating an uptick in demand. And a shortage of oil storage, which at one point drove U.S. oil futures prices into negative territory, appears to have peaked.

Oil prices, both physical and futures, have almost doubled since their April nadir, though they slipped Friday after China abandoned its yearly gross domestic product growth target.

Front-month futures for Brent crude, the global benchmark, fell 2.6% to $35.13 a barrel Friday, having rebounded from their $19.33-a-barrel low on April 21. Its physical counterpart was priced at $34.13 a barrel late Thursday.



Physical oil tends to be traded by major commodities trading houses, oil companies and refiners who have the financial heft and logistical capacity to store large amounts of oil in case they need to wait for a better pricing environment.

One of the largest independent traders, Trafigura Group Pte., has been on a buying spree. The Swiss company snapped up at least 15 cargoes of North Sea crude—amounting to 9 million barrels of oil—between May 13 and 21, according to S&P Global Platts. Trafigura declined to comment on its bet on North Sea crude, which was reported by Reuters.

Smaller traders also buy physical barrels of oil or refined products, for instance by filling fleets of tanker trucks with gasoline, selling it on to gas stations when prices move higher.

Overall, the gap between physical oil and futures was more pronounced in international markets than the U.S. As a largely seaborne crude, Brent producers could rush to store oil on massive tanker ships. Sellers of the largely landlocked U.S. benchmark, West Texas Intermediate, had to pay buyers to take it off their hands when futures prices turned negative on April 20.

Unlike Brent oil futures, which are all cash settled, some WTI futures contracts require their owners to take delivery of physical oil when the contracts settle. Even so, physical WTI at the end of March was $6 less a barrel than the futures market.



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That gap is now close to gone. The storage conditions were feared to be most acute in Cushing, Okla., where WTI contracts are settled.

“We didn’t see tank tops at Cushing. Instead we’ve seen phenomenal levels of shut-ins,” said Edward Marshall, a commodities trader at Global Risk Management, referring to the act of oil producers turning off wells to choke supply.

A pickup in refiner demand to supply Americans getting back on the road has helped WTI’s recovery. Pipeline flows from Cushing to Midwestern refiners are 400,000 barrels a day higher than they were in early April, according to commodity-market information provider Genscape.



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Oil Prices Soar As Traders Prepare for Wild Ride to Continue

West Texas Intermediate futures that will deliver oil in June, the U.S. benchmark, rose 20% to $16.47 a barrel. Brent crude futures, used to set prices for oil throughout global energy markets, rose 8.6% to $22.12 a barrel.

Helping prices regain some lost ground: signs of a recovery in demand for oil in China, which is emerging from coronavirus lockdowns, and tensions between the U.S. and Iran. The two nations engaged in a new round of antagonism Wednesday, when Tehran said it had launched its first military satellite into space.

“When you look at China, road traffic and refinery operations are back up,” said Norbert Rücker, head of economics at Swiss private bank Julius Baer. “Don’t forget the geopolitical side too,” he added, referring to the potential for U.S.-Iranian tensions to disrupt the movement of oil through the Strait of Hormuz, a vital channel for tankers.

The advance in prices Thursday continues a period of outsize moves in global energy markets, which have rippled through to oil producers, bond markets and currencies. The price of the most actively traded WTI futures contract has moved up or down 10%, on average, on each trading day since the start of March.

That compares with an average move in either direction of 1.5% in 2019 as a whole, according to FactSet data.


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Traders and analysts say prices will continue to swing. One gauge of how volatile WTI futures prices are expected to be over the next 30 days, the Cboe Crude Oil ETF Volatility Index, has soared more than 730% this year to its highest level on record.

Like the better-known VIX index tracking volatility in the stock market, the index uses options prices to calculate how far traders are expecting prices to move over the next month.

The oil volatility options aren’t tied to oil futures prices directly but instead to United States Oil Fund LP, an exchange-traded fund that aims to match U.S. crude prices. The fund has been at the center of the oil price drama in recent days. It accumulated a huge position in the futures market thanks to a rush of cash from individual investors.

The pandemic has stopped the world from consuming tens of millions of barrels of oil it would otherwise use every day, and storage space is filling up. Production cuts by the Organization of the Petroleum Exporting Countries and its allies, led by Russia, won’t immediately offset this decline in demand.

U.S. crude prices remain 41% lower than they were at the end of last week. In an aberration of historic proportions, the lightly traded May WTI futures contracts fell below $0 for the first time on Monday, meaning traders had to pay buyers to take oil off their hands.

“We’re close to capitulation,” said Marwan Younes, chief investment officer at Massar Capital Management. “We’re getting close to the point when people just stop trying to buy this,” he added, referring to U.S. crude oil futures.

Crude-oil stockpiles in the U.S. climbed by 15 million barrels to 518.6 million barrels last week, the Energy Information Administration said Wednesday, putting them about 9% above the five-year average. Production fell by a modest 100,000 barrels a day.



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Traders Bet On Falling ‘Fear Gauge’

The volatility gauge tends to rise when markets fall and investors reach for stock protection through the options market. The VIX climbed to 82.69 Monday, topping its high of about 80 in 2008. After the financial crisis, trading derivatives tied to the VIX took off as people sought to profit from its swings.



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Many are wagering its recent jump won’t be long-lived. Betting on its fall through what is known as the short volatility trade has been particularly popular in recent years. This can be a risky tactic that backfires when stocks slide as sharply as they have in recent weeks as the spread of coronavirus has raised the risk of a recession.

As stock markets staged a modest rebound Tuesday, some of the most popular contracts were tied to VIX falling to 27 or 20, Trade Alert data show, closer to levels hit earlier this year when major indexes hit records.

Still, turbulence in markets has been high, triggering diverging views on the gauge’s path. Analysts at Credit Suisse Group AG said another steep selloff similar to Monday’s could push the VIX above 100. The S&P 500 fell 12% that day, one of the worst sessions in its history.

Some options traders have already been positioning for that, scooping up contracts tied to the VIX jumping as high as 100 or even 130, Trade Alert data show. Those are among the smaller positions outstanding but were some of Monday’s most popular trades, according to Trade Alert.

“While this is surely possible, we believe it is highly improbable,” wrote Jonathan Golub, an analyst at Credit Suisse.

Cboe Global Markets Inc., the exchange operator that oversees VIX options trading has added new strike prices—or levels at which options can be exercised—during the recent market tumult. Cboe added options with a strike of 100 on March 2 and more strikes were added the following week, a spokeswoman for the exchange said.






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