The crash in crude prices could force some U.S. oil drillers to go under, says one trader.
“We've already seen a couple of companies that have ... filed bankruptcies over the last week. I think it's going to be very, very difficult for a lot of these United States oil drillers to actually survive this scenario,” John Caruso, senior market strategist at RJO Futures, told Yahoo Finance.
On Monday the price for WTI (CL=F) May futures expiring today collapsed below zero for the first time in history. Oil producers were paying buyers to take crude off their hands as storage capacity is full and economies are at a standstill amid COVID-19. The commodity sell-off continued on Tuesday into U.S. crude futures for June delivery (CLM20.NYM) and also Brent crude (BZ=F), sourced from the North Sea.
“What we've seen on the demand side of the market has been completely unprecedented. We're losing 25 to 30 million barrels a day that has come offline since the onset of the virus,” said Caruso.
OPEC+ recently announced a production cut of 9.7 million barrels a day. Analysts point out the reduction is not enough to offset the collapse in oil demand, and cuts won’t start until May 1.
‘Difficult to try to forecast what demand is going to look like three months from now’
”This is a little bit of a bottoming process here,” says Caruso, “But as a trader, I think you still have to look at selling rallies in the forward contracts until we do see the economy start to show some signs of life and things come back to normal.”
Predicting when that will be is difficult. “I think the name of the game here is the demand side of the market. You need to see demand come back again,” he added.
“It's going to be even more difficult to try to forecast what demand is going to look like three months from now, six months from now, even a year from now,” said Caruso.
In a note to investors on Tuesday, Goldman Sachs predicts a “violent rebalancing” for oil in the coming weeks, warning “price volatility will remain exceptionally high” in the near term.
Ines covers the U.S. stock market from the floor of the New York Exchange. Follow her on Twitter at @ines_ferre