What happens when an unstoppable force hits an immovable object?

The next +/- month in the oil & energy market is going to be nuts. We will see some the worst financial conditions in decades

Worth considering that this may be quite bullish.

Thread with a bunch of charts

Not going to unearth anything new about storage here, but a quick recap

Storage = Supply (Production) – Demand (Refinery Input + Exports - Imports)

Production: Flat(ish)
Demand: Down a lot
Storage: Nearing capacity as drop in demand side dwarfs supply side decline

Production (down ~0.8 mmbbld from recent highs)

Refinery Runs (down 3 mmmbbld from seasonal run rate)

Exports (down 0.9 mmbld) & Imports (down 1.1 mmbld). Net impact 0.2 mmbbld

Cushing Inventories (last wk +5 mmbbl). Storage build run rate suggests capacity in 2-4 weeks

Total US (last wk +15 mmbbl). Storage build run rate & pending import surge suggest capacity in 2-4 weeks

Global Available Storage (from GS). Storage run rate suggests capacity in 2-4 weeks

If something can’t happen, it won’t

Crude supply will not breach tank tops. It can't.

When storage capacity is effectively consumed, the market will force a near instantaneous S/D balance via shut-ins b/c that is the next available balancing mechanism. US is ground zero

What happened this week was prologue

Monday, crude prices on the screen went negative. From Tues open to close on Fri the sector rallied 10%, closing up each day

It seems odd that the crude market was one week closer to storage capacity, yet crude & energy equities rallied

Perhaps the market started tightening. A handful of producers have publicly announced shut-ins there is chatter of much more. This week might have seen the first impact from some shut-ins marginally tightening an extremely loose market.

Less storage available, yet timespreads tightened throughout the back of the week

And the CL curve started to flatten (albeit small) after the lows in crude & timespreads. These are the initial signals of a tightening market

Was this week a portent of market reactions to pending shut-ins?

Below is schedule of energy-earnings calls in the coming 3 weeks. Every call will feature questions from analysts asking about shut-ins. A wave of crude shut-in announcements and disclosures is imminent

So the next 3-4 weeks is a mesmerizing singularity of crude storage, crude shut-ins, and risk appetite headlines.

In the physical world, there’s too much supply today, by a country mile. Available storage will get filled.

When there’s nowhere left to put the crude, operators will have to shut-in. Cash prices will plummet and force producers’ hands.

Regional crude prices are under strain already, some within the range of cash costs, but these prices will prove untenable in the coming weeks.

In an abbreviated time frame, producers will shut in 1, 2, 3, 4+ mmbbld because there's literally no other alternative. Then, the market will instantaneously be in balance. It will go from massively oversupplied to perfectly balanced in the blink of the eye because it had to.

Then what? A few guesses:

Timespreads will rally hard from pricing in storage economics to balanced supply/demand.

Rally in timespreads will pull up crude price in line with history

Curve will flatten and creep along towards less contango with an eye on (eventual) backwardation

Equities will rally when crude rallies. We saw that this week.

In the initial rally, the losers on the way down become the winners on the way, until things normalize.

Fundamentals and relative valuation will matter later, but off the bottom, not so much.

Note too that the market loves, loves 2nd derivative. Loves to reposition when the rate of change inflects. So, not necessarily when something bottoms, but when the rate of deterioration slows.

Case in point. Rate of change (5d) in crude (blue) vs equities (white). What will this chart look like when market digests millions of bbl/d of shut-ins next month instead of thousands bbl/d like this week?

These may be the ravings of a madman, but from a risk management standpoint, you should consider what your portfolio would do in the event that something like this plays out. Focus on capital preservation first, P&L second.