Crude Oil: Not out of the woods by any means – TD Securities

On Monday, the May WTI crude futures (May contract) price dropped into negative territory for the first time in history. Analysts at TD Securities point out the key concern remains the surge in ETF length, as investors were likely lured by historically low spot prices and an improving supply narrative, this length could be prone to unwind in the coming month. They think the risk remains elevated as the ETF holders' costs associated with rolling will likely remain steep, potentially leading to large actualized losses that may catalyze a capitulation on a large scale.

Key Quotes: 

“While the plunge into deeply negative territory and a $60/bbl difference between May and June was a 20-sigma event and may not necessarily repeat itself in the June contract — we are not out of the woods by any means. The risk of hitting tank tops in the key US delivery points such as Cushing remains a key concern and may continue to weigh on prompt prices and keep contangos elevated.”

“Those investors who hold June spec length may be incentivized to roll their open interest early, being cognizant that the contango will remain elevated, liquidity scarce and of the extremes that can materialize in these circumstances. But given that storage is either filling up fast or is fully contracted, and oversupply will continue to be at record levels due to COVID-19, even a more orderly rotation will very likely apply downside pressure. “

“The left tail remains wide in crude oil — we remain concerned that the steep roll costs associated with an extreme contango could catalyze a reversal in the large ETF position built over the past few weeks. The steep contango, which of course is itself related to the massive actual and expected inventory builds, could even steepen further, which would ultimately translate into a large loss for those investors which are long — potentially, culminating in a capitulation.”