As COVID-19 Cases Continue to Rise, Will Negative Oil Prices Return?

  


Although lockdown measures have been easing across the world, the coronavirus pandemic is far from over. In fact, the situation is actually getting worse in a number of countries, such as the United States. So what does this mean for oil?

As Finance Magnates reported, the total number of people to test positive for COVID-19 has now surpassed 10 million, according to Johns Hopkins University. This has been largely led by an uptick in cases across the United States, Brazil and Russia.

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But not only that, countries that looked to be doing particularly well or had flattened the curve, such as Australia, Israel and China have all started to record a rise in cases in recent weeks.

So what does this all mean for oil? In April, the price for West Texas Intermediate (WTI) May futures contracts went into the negative territory for the first time in history, as lockdown measures significantly reduced the demand for oil.

However, since this event, prices have not gone negative again. In fact, hope that restrictions will continue to ease even provided a boost for prices. However, if cases of COVID-19 continue to rise around the world, or if there is a so-called second wave, could we see negative oil prices again?

Oil prices are holding up well

According to Keir Gould, the Head of Trading at Vantage FX, oil prices have held relatively well despite the uptick in COVID-19 cases, with only a slight pullback after news came out that cases were increasing in the United States.

“A re-implementation of restrictions would likely see another demand shock and lead to a re-acceleration in the global supply glut, this would most likely see the price retrace and most analysts to re-evaluate their end of year forecasts downward, although it is hard to see the previous lows being re-tested,” Gould told Finance Magnates.

Charalambos Pissouros of JFD Bank
Charalambos Pissouros, Senior Market Analyst at JFD Group

According to Charalambos Pissouros, Senior Market Analyst at JFD Group, there is currently a battle between market participants – those who are placing bets that economic recovery will be faster than previously thought, and those who are worried about a second wave of COVID-19.

“I don’t believe that the surging cases by themselves could result in another plunge in equity and oil markets,” Pissouros outlined. “What could do so is the re-introduction of lockdown measures around the globe, which could result in another hit to the global economy.

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“For now, I am neutral on oil. On one hand, as long as most nations around the globe continue to ease their restrictions, economies are on the road to recovery, which could slowly revive demand for energy products. On the other hand, a second round of ‘stay at home’ measures could diminish demand, allow supply to surge, and thereby storage space to shrink, which could result in lower oil prices again.”

Will negative prices return for oil?

Although oil prices are holding up well for now, does that mean we will see negative oil prices again? According to Gould, the unprecedented price movements which happened in April are unlikely to happen again.

“It’s unlikely we will see negative oil prices again, the original occurrence happened as a result of the incorrect assumption that the WTI contract wouldn’t be allowed to trade below negative on the exchange, when this was disproved opportunistic short sellers forced a squeeze on the institutional traders that needed to roll their futures contracts on the last day of trading, forcing the price into negative territory. 

“Having been burnt once most institutions and brokers have changed their internal processes to prevent being caught out on the roll in the future, opting to roll a week or two in advance or simply hedging and trading in longer dated contracts. Combine this with the fact that China’s largest state owned oil refiners are in the process of forming a purchasing group which should increase global demand and it’s hard to see negative prices re-occurring.”

Pissouros, on the other hand, said he’s not willing to rule out negative oil prices: “As I already noted, in order to see oil prices decently lower, a new round of lockdown measures must be adopted worldwide, in my humble opinion. Now, whether we could see negative oil prices again, or not, may depend on how long any new restrictions will last. Back in April, the reasoning behind the dip into negative waters was that holders of May future contracts were willing to pay money in order to avoid taking delivery and paying extra storage costs. Thus, conditional upon another two or three months of lockdown measures, I cannot rule out this happening again.”

Oil trading continues to draw in traders

With the increased market volatility, more traders flocked to oil, trying to profit from the largest price swings. This increased popularity resulted in the launch of numerous oil products.

As Finance Magnates reported, earlier this month, FXCM launched two new CFD products – UKOilSpot and USOilSpot. The two new spot oil products will represent the current spot price of West Texas Intermediate and Brent Crude.

eToro also launched an oil portfolio, called OilWorldWide, which gives retail investors exposure to 20 global companies across the oil sector, and IS Prime created a solution that aims to combat the risks of the spot oil price potentially going negative again.

“Trading volumes have increased significantly across the forward curve with many institutions simply maintaining their hedge further out the curve to avoid contract roll risk,” explained Gould.



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