European crude trading led by uncertainty, structure and storage amid "carnage": traders

London — North Sea crude oil traders were attempting to keep pace with the rapid market swing Monday morning, as they battled to manage uncertainty, read developing paper structures and secure viable storage options in an unprecedented trading environment.

Crude oil futures plunged in London during morning trade Monday, as Saudi Arabia entered into a price war and coronavirus fears continued to pressure demand. At 1242 GMT, May ICE Brent crude futures were down $10.40 from Friday's settle.

OPEC+ had been expected to agree to production cuts of 1.5 million b/d to counter demand destruction caused by the coronavirus outbreak. However, Russia refused to agree, causing the deal to collapse, and Saudi Arabia retaliated by slashing export oil prices and increasing production to more than 10 million b/d in April.

In reaction to the news, European traders were greeted by extreme volatility to start the week.

"[I am] surviving the carnage. I think there is a lot of P&L management basis the size of the moves and the swift change in overriding fundamentals," one source said.

From a physical perspective the huge drop in flat price values comes at a time when spot North Sea differentials were already under pressure both locally and in Asia on the back of significant demand destruction following the coronavirus outbreak.

"The market is oversupplied and will now be swamped with oil. The contango should widen and front-end dates should suffer most. The North Sea can't compete with those Saudi OSPs," a source said. "Agendas aside, this is serious. Weakness in the North Sea [may] be extreme."

From a paper perspective, some market participants were waiting to see whether the volatility would be sustained, but hedging structures were already reflecting weak sentiment along the curve.

"Everyone [is still] getting their bearings but structure is providing some opportunities for sure," a trader said, adding that physical crude traders will likely take advantage of the "clear economics to storage" given the sell-off in the market.

"Everybody should be looking at land storage," another trader said.

Shipping sources were also evaluating the viability of floating storage in such an extreme timeframe.

"The initial impact on the tanker markets will be positive, cheap oil will spur demand. First, storage will be in play as the money is better for shipowners there, then will come higher rates for the spot voyages," one source said.