SINGAPORE (Apr 21): The benchmark West Texas Intermediate (WTI) plunged into negative territory for the first time in history, as crude oil prices plummeted 300% to around minus US$40 per barrel on Monday.

The unprecedented collapse sees sellers effectively paying buyers to take the commodity off their hands.

The drop in prices comes as no surprise to investors due to weakening oil demand – especially from China – over the past few months. 

See also: Finally, we are being paid to consume oil

According to Peter Kiernan, lead analyst for energy at The Economist Intelligence Unit (EIU), the plunge of WTI oil prices was “largely driven by technical factors with traders selling off positions ahead of the expiry of the May contract on Tuesday”.

“Still, the unprecedented level of the fall, to as low as around -US$40, also reflects the exceedingly bearish sentiment about the state of the oil market's fundamentals,” he says.

Financial services group ING, and Phillip Futures, echo Kiernan’s views.

“The sell-off in the soon-to-expire May contract does still shed some light on the state of the physical oil market. Given the extreme demand destruction we are seeing in the market at the moment, storage is filling up quickly,” says ING in a note led by head of commodities strategy Warren Patterson.

“A big factor in the plunge in the front month contract was the U.S. Oil Fund ETF (USO), which recently accounted for nearly 25% of all outstanding May WTI futures contracts,” says Avtar Sandu of Phillip Futures. 

“As part its normal roll, the Oil Fund had to sell the front-month May contract at basically any price and roll into the next futures months,” he notes

However, Kiernan believes the drop is temporary. 

Taking on a more upbeat outlook, he adds: “Prices will show some normality once the WTI front month contract rolls over into June, as it is trading at above US$20. Brent is trading above US$20 as well”.

However, recovery will take some time. “Price pressure will continue in the coming months as storage rapidly builds up and the global economic outlook remains decidedly weak, weighing down on oil demand,” Kiernan says.

“It will take some time for the impact of the OPEC+ deal, to cut 10 million b/d from supply from May 1, to take effect, but this in itself will not be enough soak up the huge surplus that the market is currently experiencing given the level of demand contraction seen so far this year,” he adds.

Phillip Futures’ Sandu agrees, saying that “the OPEC+ deal that was finalised on Sunday had envisaged production cuts of 9.7 million bpd in May and June, with the cuts tapering through the rest of 2020, 2021 and the first quarter of 2022”, and that the recovery of the oil market “would… largely [depend] on how fast consumer demand can come back to… ‘normal’”.

That said, it is not known whether a repeat of this will happen, especially with the spectre of the June expiry looming.

“It is likely that storage this time next month will be even more of an issue, given the surplus environment, and so in the absence of a meaningful demand recovery, negative prices could return for June,” says ING’s Patterson.

He warns that “index rolling” is another factor that could add further downward pressure to the June contract as its expiry approaches.

“Retail investors have piled into oil ETFs at these lower prices, and so these ETFs hold a larger than usual share of the June contract open interest,” Patterson says.

As oil and stocks plunged, the benchmark Comex Gold GC June Futures surged on Monday, and went past the psychological mark of US$1,700, according to Phillip Futures.

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“Covid-19 has been supportive for gold as a safe-haven asset as the number of unknowns about the spread of the epidemic remains large,” says Phillip Futures’ Sandu.

 “Financial uncertainty combined by low interest rates are bolstering gold investment demand… Net gold purchases by central banks remain robust but cracks are appearing as some traditional net buyers of gold have stopped or reduced purchases. On the other hand, expectations of weaker economic growth in large consumers India and China may result in weaker demand and act as a damper on prices,” he warns.

This came on the back of news that stocks on Wall Street were not spared either. Prices fell after Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases, and top infectious disease expert in the White House, said that the US economy would not recover until the coronavirus is under control.

That said, Phillips’ Sandu takes on a bullish outlook for gold for the time being. “With central banks increasing liquidity in financial markets, low interest rates and rising money supply are all factors that are bullish for gold in the longer term,” he says.

The way he sees it, “the short-term view is very sentiment driven with traders reacting to news. The coronavirus spread has not been totally managed and is intensifying in countries like the US and India where measures to contain the virus have not been very effective”.  

“Uncertainty continues to weigh on risk sentiment, which is positive for gold in the longer term,” he adds.