Oil: Lowest since 1999 – ABN Amro

WTI oil prices dropped to the lowest level since early 1999 yesterday. Just before the expiration of the May contract, prices dropped by 40% to below USD 11/bbl, strategists at ABN Amro apprise.

Key quotes

“High inventories in combination with the oil demand shock caused by the coronavirus measures have triggered a steep contango for oil prices. Although many investors and market participants already shifted their outstanding positions from the May contract to the June contract in the days before, the final trading before physical delivery triggered high pressure on this contract.”

“Oil prices need to trade lower for longer to trigger production declines. The first signs of this are already apparent, with the number of active drilling rigs falling (from 683 to 438), and US crude production down from 13 mb/d to 12.3 mb/d in just a few weeks time.”

“Our macro economists expect a recovery in the second half of the year, which we expect to drive a recovery in oil prices. However, we still think the upside potential will be capped due to high inventories and the delayed effects on US shale production. This also reflects a wider Brent/WTI-spread.”