An unprecedented havoc unleashed on the global oil market by the coronavirus or Covid-19 pandemic has sent oil futures into record double-digit discounts to later contracts, with the global proxy benchmark Brent bearing the brunt of the near-term slump in crude demand.
On Friday (March 27), the Brent front-month contract for May, closed at $24.93 per barrel, -$12.27 or a 49.29% discount on the six-month forward contract for November that traded at around $37.20 per barrel over the same session.
The current price slump, that progressively deepened over the course of March, has resulted in a massive contango – i.e. a market structure indicative of trading sentiment in favor of oil prices being higher in the future compared to current prices – at levels unseen since the height of the global financial crisis in January 2009.
The 11-year contango highs follow market predictions of near-term declines in crude oil demand with whole economies in lockdown mode. According to the International Energy Agency (IEA) oil demand could be a fifth less per day from its previous projection rate of around ~100 million barrels per day (bpd) for 2020.
All of it depends on how quickly, or not, the coronavirus pandemic is brought under control in key crude consuming markets of U.S., China, India, Japan and South Korea – all which seem to be gripped by the pandemic that first surfaced in China at the start of the first quarter.
With the westward spread of the coronavirus many fear the U.S. in particular could be the new epicenter of the pandemic that’s currently crippling many European economies, especially those of Italy, France and Spain. Now major U.S. economic heartlands such as the states of California, New York and Texas are in lockdown.
But current market sentiment points to a bounce in consumption at the end of third quarter and for much of the fourth quarter of this year, with a further uptick in 2021 to follow. That’s what many traders are betting on, creating the contango structure with many rushing to grab onshore and floating storage to hoard crude.
Prices for onshore storage in North America have doubled over the last fortnight, while lease rates for floating storage in the shape of Very Large Crude Carriers (VLCCs) have jumped by a stupendous 700% to an average of $300,000 per day in some cases on the lucrative Middle East to Asia routes.
As oil prices struggle to find a near-term floor with the crisis exacerbated following the collapse of OPEC+, many including the IEA suggest demand growth could bounce back strongly and rise by 2.1 million bpd in 2021. It’s what many are pinning their hopes on leading to record contango spreads, even if the current market situation has some way to run.