Negative oil prices repeat themselves? Bank of America Warning: Crude Oil Historic Squeeze is Coming! Investors accelerate their exits, what is the situation?

The negative oil price two years ago is still fresh in the market's memory, and Wall Street institutions warned a few days ago: now the situation has reversed, this time it may be "historic shorting"!

Bank of America's commodities team released a must-read report
to professional clients on Monday titled "Cushing Buffer Stocks Left.
" The report notes that the WTI crude oil calendar spread recently surged to a decade high ($11.
70/b for 1-month and 3-month contracts), which, while now stable, remains high, which is not conducive to encouraging traders to store oil
.

As a result, inventories at the Cushing hub, which have consumed about 13 million barrels year-to-date, fell to 24 million barrels last week, the lowest seasonal level
in the shale era.
Now, storage levels may be close to operating minimums, commonly known as "tank bottoms
.
"

Given current spot premium levels, a significant portion of these inventories could be used for mixing operations and as a backup
for pipeline flows, according to Bank of America.
As a result, they may not be available for WTI contract delivery
.

To make matters worse, with inventories approaching operating minimums, almost every price signal is blocking crude oil from flowing to Cushing, which could limit resupply
.
For example, Midland WTI crude has reached a premium of $1.
50/b to Cushing, restricting northbound flows
to Cushing.
At the same time, Bakken crude oil spread $5 per barrel from WTI, indicating that Bakken crude oil is more likely to bypass Cushing and flow directly into the Gulf of Mexico market
.

In addition, the WTI-Brent crude spread recently hit a multi-year low of -$9.
20/b and is now close to -$5/b, which will encourage traders to export more crude in the coming weeks, with export volumes "likely to be recordable"
.

In summary, Bank of America believes that near-month WTI crude oil is likely to melt-up in the first half of this year, similar to the extreme scenario
when WTI crude fell to negative $40/b on April 20, 2020.

At the beginning of 2020, with the outbreak of the epidemic, global crude oil demand suffered a severe shock, global inventories were full, oil prices began to fall, and then crude oil transportation costs and storage costs began to exceed the physical value
of oil.
Near the delivery date, long contract holders faced the dilemma of "nowhere to store" crude oil, and were even willing to force liquidation with negative oil prices, causing oil prices to fall into negative territory for the first time in history
.
On April 20, 2020, US time, the May contract of U.
S.
WTI crude oil futures fell out of the first negative settlement price in history at -$37.
63
.

Unlike Brent crude oil, WTI contracts have a physical delivery mechanism that forces the convergence of the physical market and the futures market every month
.
In April 2020, this convergence was fully demonstrated before the expiration of the WTI May contract, and bulls who could not receive the goods were forced to close their positions
at negative prices.

Now, Bank of America warns that "the market landscape has reversed.
"

Bank of America believes that as the delivery date approaches, because crude oil inventories are at historically low levels, the "no oil delivery" situation may cause short contract holders to rush to buy in order to close their positions on schedule, but this may cause oil prices to reach "any position" or even "historic shorting"
.

Notably, market participants broadly cut their positions
in crude oil futures and options.
Hedge funds and other fund managers continued to reduce their positions in six of the most important oil-related futures and options contracts in the week ended March 15, selling off the equivalent of 36 million barrels of oil
, according to the U.
S.
Commodity Futures Trading Commission (CFTC) and Intercontinental Exchange (ICE).
Fund managers have sold off oil over the past two weeks to a total of 178 million barrels, and their crude oil positions have fallen to 553 million barrels, which are in the 39% percentile at the start of 2013
.
Total open interest in the most important oil-related futures contracts over the past four weeks has fallen by a record nearly 1 billion barrels, reaching its lowest level since June 2015
.

How tight are U.
S.
oil inventories?

"The continued decline in U.
S.
commercial crude oil inventories is worrying, low inventories make inventories lose their price buffer, and price fluctuations are amplified, which is also the reason why crude oil supply side encounters sudden oil surge, destocking expectations continue to strengthen, resulting in prices continue to rise
.
" Yang Jiaming, an analyst at CITIC Futures, told reporters that in April 2020, U.
S.
commercial crude oil inventories reached nearly 540 million barrels, with negative prices, after which inventories continued to decline, oil prices continued to rise, and the negative correlation between inventories and oil prices was reflected
.

According to Yang Jiaming, the current US commercial crude oil inventory is nearly 400 million barrels, reaching a new low since 2015, but the absolute level of inventories has not yet fallen to the level of 2014
.
If you look at the relationship between inventories and oil prices at that time, the prices at that time were close to now, but the total inventory in 2014 was much lower than it is now
.
This phenomenon may reflect the current high geo-premium in oil prices
.
At the same time, although the current demand for crude oil is much higher than in 2014, from the current inventory days, the current crude oil inventory days are close to the same period in 2019, not as exaggerated as the absolute number of inventories, and low inventories have long been reflected through the price, if there is an expectation of further destocking will continue to drive the price to continue to rise, otherwise the current oil price is a reflection
of the low inventory.

According to EIA data, as of March 11, US commercial oil inventories were 1143.
514 million barrels, of which crude oil inventories were 415.
907 million barrels and refined oil products were 727.
607 million barrels, both at the lowest level
in the same period in the past five years.

Cushing crude inventories of 24.
007 million barrels were last at that level in August 2018, when supply was also tight
due to logistics bottlenecks in the United States and a decline in Iranian exports, said Wang Haozheng, an analyst at Yangtze River Futures.

"Global crude oil inventories are now relatively low, with total inventories in the United States, the world's largest oil consumer, at the lowest level in the same period of five years, with crude oil and intermediate distillate stocks in
absolute terms.
This low inventory situation is also common
in Europe and Asia.
According to IEA statistics, total oil inventories in OECD countries are the lowest
in eight years.
Dong Dandan, a researcher at CSC Futures Energy, said
.

Will there be a "historic crude oil short" in the oil market?

For Bank of America's view, Yang Jiaming said that the continuous decline of US strategic reserves can be understood from two aspects: on the one hand, it is to passively respond to the rise in oil prices, and on the other hand, it is to actively use high-price reserves, because in 2022-2023, the production of shale oil in the United States will hit a record high.

Looking ahead, the oil and gas market will gradually shift from undersupply to oversupply in 2022, and if there is another supply disruption from major oil producers, a historic short-selling situation is possible
.
If the geopolitical situation eases and the pace of crude oil production increase in various countries is normal, the crude oil market will gradually oversupply
.

"I think the possibility of U.
S.
oil going short is very small
.
WTI crude oil is pipeline delivery, and delivery is scarce storage capacity rather than crude oil
.
Even if Cushing does not have much crude oil in stock in the short term, as long as WTI is at a premium to other spot prices, it will attract crude oil inflows from other regions, and it is difficult for bulls to achieve the purpose of restricting short access to crude oil, so it is difficult to constitute forced positions
.
Low Cushing inventories will push up WTI's premium relative to other crude oils, resulting in a low
probability of forced positions.
Wang Haozheng said
.

Dong Dandan believes that the price fluctuation will be greater
every time the WTI contract changes months.
The negative oil price on April 20, 2020 was also caused by
the exhaustion of liquidity on the last day of the WTI month.
As inventories continue to fall, crude oil prices tend to move upward
.
The sharp rise in WTI prices on March 22 is also related to this, if the pattern of crude oil supply and demand does not fundamentally change, the volatility of oil prices may still further increase
every month in the later period.