The coronavirus pandemic is weighing more on the oil market than the price dispute between OPEC and its allies, RBN Energy CEO Rusty Braziel told CNBC’s Jim Cramer Monday.
RBN Energy is a privately held energy commodities analytics company based in Houston that plays a role between physical markets and financial markets.
“I would say that, just off the top of my head, 15% of this is Saudi Arabia and Russia and 85% of it is Covid,” he said in a “Mad Money” interview referring to Covid-19, the disease caused by the novel virus that has put the global economy on ice.
The comments came after oil futures turned negative for the first time in history. The May futures contract, which expires Tuesday, shred all of its value after the West Texas Intermediate tumbled to negative $37.63 per barrel on Monday. The price of barrels was above $60 at the start of 2020.
Crude has taken a hit from both an oil price war and the downturn caused by government efforts to stop the spread of coronavirus, which has become a global pandemic. A disagreement between OPEC and its allies, led by Saudi Arabia and Russia, on oil production levels in March caused a major sell-off in crude. Furthermore, travel restrictions and stay-at-home orders have depleted demand for oil.
OPEC and OPEC+ agreed to an historic production of tens of millions of barrels per day earlier this month, but the health crisis still persists.
“The entire world is long on crude oil and the entire world is short on storage capacity,” Braziel said.
Braziel explained that the phenomenon in the oil market reflects a “paper-market” problem, rather than an issue with physical barrels. Futures contracts trade by the month, and the June WTI contract, which expires about one month from now, remains above $20 per barrel.
“It was a squeeze in the futures market,” he said, adding that any company that bought a contract is “obligated to receive physical barrels” on Tuesday “unless they get out of it before the market closes.”
“That’s what they call convergence. The future market and the cash market converge on the final day of contract.”
If current conditions persist, however, the challenges in the “paper market” can bleed into the physical barrel market, Braziel said.
“That means the longer that Covid lasts” and supply levels don’t match demand, “it means that storage capacity continues to fill up,” Brazli said, “and most people are thinking that sometime in the not-too-distant future storage is going to fill up. And when that happens, we could be talking about physical-market negative prices.”