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Will Crude Oil Trade Negative Again, and Is it Really Worth Less Than Nothing?

Will Crude Oil Trade Negative Again, and Is it Really Worth Less Than Nothing?

2020-04-23 11:00:00
Paul Robinson, Strategist
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Crude Oil Highlights:

  • WTI crude oil May contract went negative, could June too?
  • Oil might not be worth a lot but it isn’t completely worthless

WTI crude oil May contract went negative, could June too?

Monday’s historical price decline in the front-month contract (May) to -$40 a barrel was one for the record books, a never seen before event. Could this happen again to the current contract (June) as we head towards expiration? Sure.

With coronavirus lockdowns not likely to start lifting in a meaningful way until at least the middle of next month, the immediate demand side of the equation is likely to remain about where it is now. And since oil is still coming out of the ground with little to no storage for it, the producers are stuck with a product that effectively has nowhere to be stored. This means indeed the front month could go negative again.

May WTI Crude Oil Daily Chart (traded negative)

May WTI crude oil

WTI Crude Oil Chart by TradingView

But it doesn’t mean oil is worthless. Going out further on the curve, laddering up each month through the 20s to, say December, where WTI oil is trading at nearly $30 a barrel,it is signficantly more expensive than the June contract that is trading in the low teens. There is optimism that in the coming months we will return to some type of normalcy, thus a demand for oil, and while it may not be worth $30 later in the year it will almost certainly, barring we are still sitting at home just as we are today, be worth at least something.

How to trade this thing is a bit tricky at the moment. The technical picture is a bit muddled, and it would seem that there is room for a bounce given the extreme price movement we just saw. But remember as we head towards expiration the front month contract could indeed again head towards the zero-bound and worse.

At the very least volatility will remain high for a while giving very short-term minded traders fluctuations to trade. But if trading oil right now, trading much smaller than normal is a prudent move. And if the swings are too wild, there is nothing wrong with sitting on the sidelines until things settle down a bit. There is plenty of volatility elsewhere that traders can take advantage of.

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WTI Crude Oil Daily Chart (could bounce but still do what May did)

Crude oil daily chart

WTI Crude Oil Chart by TradingView

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---Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at@PaulRobinsonFX

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