Crude prices plunge to lowest level in history — what Cramer and others are watching

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It was a historic day for crude.

The price of West Texas Intermediate crude oil for the month of May plunged more than 190% into negative territory on Monday, hitting its lowest levels in history and highlighting the plummeting demand for the commodity around the world.

Market analysts are watching closely as concerns grow around rapidly shrinking storage space for the oversupply of oil.

Here’s what five of them, including CNBC’s Jim Cramer, said on Monday:

Watch gas demand

Helima Croft, global head of commodity strategy at RBC Capital Markets, suggested keeping an eye on gasoline demand:

“This is a really sort of interesting, unique story to the oil market. I mean, what has been hit the hardest by this pandemic has been vehicle traffic use. I mean, people are not flying. They are not driving. And so, this is a real story about storage filling up. … We’re expecting Cushing to reach tank tops by mid-May. I mean, there are other places that you can store this crude, potentially in, like, Louisiana, but until we get signs that U.S. gasoline demand is improving, that people are going to drive again, we are continuing to be very, very bearish on the demand outlook for oil. Now, there was this OPEC cut last week, this historic cut. There was a lot of focus on that. And that’s really sort of turning off the tap in the bathtub that’s overflowing, and so the situation would be far worse. But the problem is those cuts don’t take effect ’til May 1. There is still a lot of crude that is on the water right now that is going to refineries that do not need it. And so that is the challenge right now: Those OPEC cuts are not coming until May, a ton of crude on the water and demand continuing to collapse.”

Unprecedented losses

Doug Terreson, fundamental research analyst at Evercore ISI covering integrated oil and refining, expected crude oil prices to “remain very weak” in the near term:

“Our report today was called ‘A Dog’s Breakfast.’ That’s a phrase for something that’s extremely messy, which, obviously, the oil market is today as we reach 20-year lows. And the reason for the weakness is related to a couple of factors. First, expectations for oil demand and GDP are falling in an unprecedented way and by around 10 times that which we normally see in a recession. And so, while the equity market is suggesting that we’re going to have a coronavirus solution in coming quarters and that demand will recover, and we all hope that is the case, the problem is that in the near term, meaning the second quarter of 2020, supply is going to be over demand by around 15 million barrels per day or so, which, when combined with the 7-million-barrel build in the first quarter, puts us in a scenario whereby we’re probably not going to have enough storage to accommodate this supply. So, in this scenario, prices for crude oil are going to remain very weak. They’re going to be near variable production costs for marginal producers, which supports our call for Brent [at $]25 in the second quarter. But WTI … is probably going to be 70-80% of that amount. If global economic growth recovers beyond that point and OPEC and other supply cuts hold, then we’re going to see inventories decline from record levels of 90 days at the middle of this year to maybe 60 days at the end of 2020 and 50 at the end of 2021. But this is high in relation to 40 years historically. … We could have a recovery in Brent to 40 by the end of this year, but we have to have some help from the demand side.”

‘No upside’

Cramer, the host of “Mad Money,” also predicted a rough road ahead for the commodity:

“There really is no place to put the oil, and no one’s stopping to produce. And it’s funny: There’s no upside. No one’s talking about the good news of it, and I think that’s because no one’s going anywhere to take advantage of it, so to speak. And you watch the airline stocks go down. That used to be something that moved up. So, almost everything that happens is viewed as negative in the physical commodity world.”

The impact of low oil prices

Jonathan Golub, chief U.S. equity strategist for Credit Suisse, cautioned that some of the action driving oil prices below zero was “unreasonable”:

“There are some technical things going on with the futures contracts because they’re expiring and rolling over tomorrow, which makes this a little bit of an unreasonable read. If you look out further into the June contract or even the contracts that go out a year, they’re off, but they’re not off nearly as much. My concern, though, is that in general, lower oil — it’s not only about the energy sector, which is small, but it’s the impact that this is going to have on credit and banks and other sectors that lose money when these energy companies can’t pay their loans.”

Industry consolidation

Mark Vitner, senior economist at Wells Fargo, painted a slightly grimmer picture:

“I know that you look out at some of the contracts a little bit further out and they’re higher, but I’m not so sure that we’re going to see enough improvement that they do not come down as well. And so, I’m really concerned that this is going to usher in a much bigger wave of bankruptcies. Ultimately, we’re going to have to have a consolidation in the energy industry. It’s going to result in some pretty significant job losses. It’s going to hurt Houston. It’s going to hurt Texas. There are other things that are going right in Texas, but, really, some of the higher-cost oil-producing regions in the United States, they may be in for some harsher adjustments.

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