Will we see negative oil again?

Crude oil’s descent into negative territory for the first time ever last month was a Black Swan event, CIBC portfolio manager Brian See says. But it may happen again.

“The outlook for oil is going to be extremely volatile and choppy,” said See, a vice-president and equity analyst at CIBC Asset Management, in an April 29 interview.

“There’s simply too much oil supply in the world today.”

See called the current market environment a worst-case scenario — but one he says could recur, month after month, as long as the Covid-19 shutdowns depress demand for the commodity.

On April 20, the benchmark price for crude oil fell to -US$37.61 ahead of the settlement date for the May futures contract.

See, who manages the CIBC Energy Fund, described the remarkable event as the outcome of “a painful price discovery process of futures oil contracts being unwound.”

Oil is sold one month forward so the contracts need to be unwound near the end of the month. The financial sellers of the contracts are looking to unload their positions to avoid actually taking a physical delivery of oil, he said.

Normally, refiners or storage operators buy these contracts.

“Because of fears of too much supply and the crude not being able to get into storage — in other words, the lack of storage capacity — these oil contracts are then going to price to whatever level is necessary for financial players to actually sell them,” See said.

In late April, that meant negative oil prices. And as unusual as that was, it could happen again.

Last week, Horizons ETFs rolled the underlying exposure in two of its crude oil ETFs all the way to the September futures contract to reduce the chance of another negative contract.

OPEC production cuts will help reduce supply, as will other countries — Canada, the U.S., Brazil and Norway — curtailing production because it’s no longer profitable at depressed prices, See said.

“The big issue in the short term is that these production cuts, although significant in size, are just not enough to offset the significant demand loss from Covid-19, which we estimate is at 20 million to almost 30 million barrels a day at its peak,” he said.

The good news comes from data showing fewer new infections in many countries, and the reopening of China’s economy. Even as demand picks up later this year, See said there will still be a significant amount of inventory to get through.

Prices will start to recover next year and in 2022, he said, returning to the $40 or $50 range longer term.

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