Energy analyst Pavel Molchanov explains this strange but very real phenomenon caused by storage quirks.
The most pressing near-term concern in the oil industry is a physical lack of storage, as inventories around the world are becoming saturated. This is what’s known as “oil on oil competition”: quite literally, barrels have to compete for scarce space in storage tanks.
While this issue may seem technical, fundamentally it is the direct result of the dramatic, unprecedented disruption in global oil demand caused by the COVID-19 pandemic. To be clear, the problem is not excessively high supply. The problem is the fact that upwards of 20% of global oil demand is currently offline, mainly due to the COVID-related lockdowns (non-essential business closures / stay-at-home orders).
As it relates to the WTI crude oil price specifically, we need to keep in mind that this price is very localized at the Cushing storage hub in Oklahoma. By contrast, Brent crude is a fundamentally more global benchmark, so there is less fear of any single storage site becoming over-full. This explains the unusually wide divergence between WTI and Brent prices. Until the physical storage situation in Cushing becomes alleviated, the current bizarre trading dynamics with WTI will likely persist.
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital.
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