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On Monday, U.S. crude oil futures fell into negative territory for the first time ever, with WTI Crude closing out the day at just over -$37 per barrel. Stu Kedwell, Senior Vice President & Senior Portfolio Manager, Co-Head, North American Equities, RBC Global Asset Management, reflects on the significant drop in demand for oil amidst the crisis, and what the pandemic-induced sell-off could mean for energy stocks in the long-term.


Hello and welcome to the download, I’m your host Dave Richardson, and I’m joined once again by the co-head of North American Equities at RBC Global Asset Management, Stu Kedwell. And I guess we can just add it to the list: the activity yesterday and today in the oil market, in the futures market, where we saw at one point yesterday oil futures, the futures contract for May for WTI crude, trading in the negative territory, about negative thirty-five dollars. And we can just throw this on the list of unprecedented events that we’ve seen through this Covid health crisis and the market crisis that it spawned. Stu, the markets have been down the last couple of days, but is that really in reaction to what we’re seeing here or is this something that is really more market driven and not something that markets should be that concerned about?

Well, it is a reflection of a lot of what’s been going on in the markets in the last six or eight weeks. It is that the demand for energy has dropped significantly, maybe by 20 or 25 million barrels a day, and the industry is slowly responding to that, both through cuts due to financial reasons and cuts due to more political reasons. And they just haven’t responded fast enough to save the May contract. You know, as you said, added to the list of things that I’ve never seen before… — until yesterday, the only ever thing I’d seen trade negative from a commodity standpoint was: there are times when a windmill is running in the middle of the night and the power has to go somewhere. And sometimes the owner of the windmill has to pay someone to take it because there’s just no usage. And it’s kind of a similar analogy to yesterday. If you’re a financial player and you own the futures contract, if you can’t take delivery, then you have to sell it. So other than bringing a hose up to your bathtub and filling up the tub, you’re out of luck. And that’s what we saw in markets yesterday. The energy stocks themselves have not been as affected the same way as the price of crude, and in some respects, have reflected this environment that we’re in for some time. You know, we were just discussing, I know what a tank top is, — and it’s not a piece of clothing I wear! That means that the oil tank is near top. So this has been an event that was quite spectacular yesterday in the financial markets, but it has been playing out for some time in the actual real economy and with the stocks themselves.

And so Stu, were you completely surprised by this? Again, I know it’s one of these unprecedented events, but was it really a surprise?

Just going back to that windmill analogy, you just have no idea. I think the math is something like: a third of the May financial contract was owned by a financial instrument called the USO, and it has to sell that oil and then it rolls it into the next month’s oil, and it’s doing it, no matter what. So, the fact that it went negative? Yes, I definitely wrote that down. I was talking to Doug and some other peers and said: that’s really quite something! But as to where it would actually go, I just don’t know. So, you wouldn’t predict it, but you knew it could happen.

OK. Well, you know, the windmill example and that need to pay someone to take something off your hands because it’s there and you have to dispose of it is probably the best analogy that I’ve heard to explain it. Stu, thank you. Thank you for your time today. Great explanation. And it’ll be interesting to watch where oil goes from here.

Thanks Dave.


Recorded April 22, 2020

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