For the second consecutive day oil prices plummeted, dragging down stock prices with them.
June U.S. crude oil futures contract ended the day down 43% from Monday’s close at $11.57 a barrel. May futures contracts, which expired today and which closed Monday with an unprecedented negative price — of almost -$38 a barrel — finished at $10.01 a barrel.
The S&P 500 index finished down 3% to 2,736 and the Dow Jones Industrial Average ended down 2.6% at 23,018.
“Demand has essentially collapsed,” said Bart Melek, global head of commodity strategy at TD Securities, about the oil market. He expects a continued “massive decline” in demand until the lockdowns of economies around the world begins to ease.
According to Melek, demand for oil has fallen by 25 million barrels per day, far more than the 10 million barrels per day cut that OPEC and Russia agreed to make in May and June.
In the meantime, storage for the surplus oil is disappearing around the world. That played a major role in Monday’s plunge into negative oil prices. Investors owning May crude oil futures were unable to roll over into June due to lack of buyers, which meant they were stuck with taking delivery of physical crude at the contract’s expiration — and willing to pay a buyer to take it off their hands. The same thing could play out later this month with the current June futures contract.
“Can we go negative again?” asked Melek. “Anything is possible. Until yesterday it never happened before, why not again?”
He explained that “the problem is that these futures contracts are physically commodities. If they can’t be stored, production has to stop. The market is telling you that product cuts are needed everywhere.”
But many small producers, including frackers, don’t want to stop production because of the high costs to restart operation. Melek says they will if prices turn negative again.
Another dimension in the market: ETFs. They account for about 25% to 30% of open interest in the futures market, and they certainly don’t want to take the physical commodity.