While it may be tempting to argue that the worst is behind us for oil price given the historic collapse in WTI which crashed to negative $40 on Monday as holders of May WTI futures panicked to sell their holdings at any price – even paying the “buyer” for taking possession of the deliverable barrels – Goldman’s chief commodity strategist Jeffrey Currie reminds us that it is important to remember that unlike bonds and stocks, “commodities are spot assets, not anticipatory assets and must clear current supply and demand, which remain extremely out of balance in all markets.”
And since oil supply remains vastly greater than demand, we are merely in the eye of the hurricane at least until the June WTI maturity in one month, with Goldman expecting the market to test global storage capacity in the next 3-4 weeks – unlike WTI which was merely a Cushing event – which will likely create substantial volatility with more spikes to the downside until supply finally equals demand, as with nowhere to store the oil, supply has no other option but to be shut-in down in-line with the expected demand losses.
Alternatively, we could see another “Monday massacre” with producers of oil willing to pay buyers to take physical possession right around the time all global capacity is full, unless of course US shale producers drastically cut output in the coming days, not weeks.
That’s the bad news: the good news is that slowly the market is rebalancing, and once production is well and truly shattered, there is a potential for a violent price reversal – but remember, one can’t just “price it in” as commodities have to reprice through the spot, not forward channel.
As Currie notes, “we have now entered the inflexion phase where the rebalancing has started, but this period could take 4-8 weeks to resolve before we can comfortably argue a bottom has been carved out.” This timeline assumes that peak demand loss was likely to last week with nascent restarts in Europe now underway, but as Goldman concedes substantial uncertainty remains.
In conclusion, “while acknowledging that a balanced market is in eyesight, more forward-looking assets like equities can look past the next several weeks and begin to price a recovery; however, commodities simply do not have that luxury.”