A Bearish Month In Brent And WTI But Not In Oil-Related Shares

Summary

• The market is holding its breath for July expiration in NYMEX futures.
• The June Brent expiration was smooth because there are more delivery options.
• Inventories continue to rise, but rig counts are falling off the side of a cliff.
• Seasonality could cause stability as easing restrictions come as the driving season begins.
• Trading from the long side with tight stops- Oil stocks say we have seen a bottom.
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April 2020 ended last Thursday, and for all participants in the oil market around the world, it was the longest and most volatile month in history.

The nearby NYMEX crude oil futures contract on NYMEX traded in a range from negative $40.32 to $29.13 per barrel. The $69.45 trading band was the widest for a month in modern-day history since crude oil futures began trading on NYMEX in 1983. There were many firsts for crude oil in April 2020, it had never traded below $9.75 per barrel, nor had it traded at a negative price. The price of the June futures traded to a low of $6.50 above zero during the month. June NYMEX futures settled at $18.84 per barrel level on the final day of April.

Meanwhile, the range in nearby June Brent futures that expired on April 30 was from $16 to $36.43 per barrel or $20.43. Under one-third the range in the NYMEX WTI futures. On a month-on-month basis on the continuous futures contract nearby NYMEX futures fell from $20.10 to $18.84 or 6.3% in April. Brent, at around $25.25, had a smaller loss for the month. The price action masks the massive ranges in the two crude oil benchmarks during the month.

Meanwhile, the Vanguard Energy Index Fund ETF Shares (NYSEARCA:VDE), which holds shares in many of the leading oil companies closed March at $38.22 and at $50.53 per share on April 30, a gain of over 32% for the month. Crude oil shares that had lagged the energy commodity significantly outperformed the price action in crude oil in April as they played catch-up.

The market is holding its breath for July expiration in NYMEX futures

The May expiration in NYMEX crude oil was sloppy, ugly, and the worst in history.

Source: CQG

The quarterly chart of nearby NYMEX crude oil futures highlights the price carnage that occurred on April 20. With nowhere left to store landlocked crude oil in the United States, the May contract fell to below negative $40 per barrel on April 20, one day before the contract expired.

On the long-term chart, both the price momentum and relative strength indicators remained in downtrends despite the recovery to just below $19 per barrel at the end of April. Quarterly historical volatility at over 56% was at the highest level since 2010. Open interest at 2.303 million contracts has been trending steadily higher throughout the years.

Towards the end of May, when the June contract moves towards expiration, the market is likely to make preparations, so there is no repeat performance for the next expiration. However, demand remains problematic, and crude oil storage is overflowing in the US and around the globe.

The June Brent expiration was smooth because there are more delivery options

On April 30, the June Brent futures expired and rolled to July. The far less volatile Brent contract settled at the $25 per barrel level without much fanfare.

The delivery point for NYMEX WTI crude oil is in Cushing, Oklahoma, making it a landlocked futures contract. Brent crude oil travels the world by ocean tankers, so there are many more delivery options. Brent is the benchmark pricing mechanism for two-thirds of the world’s producers and consumers. The optionality of Brent crude oil when it comes to delivery choices avoided the price action seen in the WTI futures market at expiration.

Inventories continue to rise, but rig counts are falling off the side of a cliff

Crude oil inventories in the US continued to grow last week with the American Petroleum Institute and Energy Information Administration reporting respective increases of 9.978 million and 9.00 million barrels for the week ending on April 24.

Source: API

The chart illustrates the rising stockpiles in crude oil and oil products since October 2019, according to the API.

Source: EIA

The EIA data displays the same trend. Meanwhile, in response to the plunge in demand and rising stockpiles, US daily production fell to 12.1 million barrels per day as of April 24, which was 1.0 million barrels below the peak from mid-March.

As of May 1, Baker Hughes reported that the number of oil rigs in operation in the US stood at 325, 482 below the same time in 2019 when 807 rigs were operating.

Seasonality could cause stability as easing restrictions come as the driving season begins

Social distancing guidelines in the United States are easing in some parts of the country. Scientists have said that the impact of the virus appears to have peaked. While there could be a resurgence of cases as people venture out of their homes, science seems to be closing in on effective treatments as one of Gilead’s drugs showed positive results in clinical trials.

The easing of distancing comes when the demand for gasoline begins to peak in the US during the driving season. As people become more comfortable venturing out of their homes, we could see a sudden return of demand. After being cooped up, many people will jump at the chance to get back in their cars and put mileage on their odometers over the coming weeks and throughout the summer season.

Oil-related stocks had been signaling a problem in the oil market throughout 2019 and during the beginning of 2020. They underperformed the stock market and the price of oil. In April, the trend reversed with losses in the energy commodity, but gains in the equities.

Trading from the long side with tight stops- Oil stocks say we have seen a bottom

Oil stocks could be telling us that the price of the energy commodity is ready to drift higher after a month of wild volatility in April. The fund summary and top holdings of the Vanguard Energy Index Fund ETF Shares (VDE) include:

Source: Yahoo Finance

VDE has net assets of $2.46 billion, trades an average of over 1.88 million shares each day, and charges a 0.10% expense ratio.

Source: Barchart

After falling to a low of $30.03 on March 19, the lowest level of this century, VDE closed March at $38.22 per share. On April 20, the day that NYMEX crude hit its low and traded in negative territory, the low in VDE was $42.05 per share. The ETF closed at $50.53 per share at the end of April. Selling in the stock market on May 1 sent VDE lower, but June crude oil futures on NYMEX traded above the $20 per barrel level with the now active month July Brent futures above $26 per barrel.

If crude oil shares had been signaling the price carnage that occurred in April, they could now be telling us that the worst is behind the energy commodity. I would approach crude oil from the long side with very tight stops as volatility is likely to continue after the wildest month in history.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.