Oil futures in unprecedented crash below zero as May contracts end
Output deal by Opec and allied members a week ago to curb supply ‘too little too late’
New York — Oil futures collapsed to below zero for the first time ever as the deepening economic turmoil caused by the coronavirus crisis left traders desperate to avoid taking delivery of physical crude.
In an unprecedented day of trading, the price for the May contracts wiped out all value, breaking every low for oil prices since 1946. The exchange where West Texas Intermediate (WTI) futures trade said the contract would be allowed to price below zero. The extreme move showed just how oversupplied the US oil market has become with industrial and economic activity grinding to a halt as governments about the globe extend shutdowns due to the swift spread of the coronavirus.
An unprecedented output deal by Opec and allied members a week ago to curb supply is proving too little too late in the face a one-third collapse in global demand.
On Monday, a technical oddity worsened the price plunge as traders fled the May futures contract ahead of its expiration on Tuesday. The after month’s contract fell 12% to $22.05 a barrel, making the spread between the two months blow out more than $20.
“There is little to prevent the physical market from the further acute downside path over the near term,” said Michael Tran, MD of global energy strategy at RBC Capital Markets. “Refiners are rejecting barrels at a historic pace and with US storage levels sprinting to the brim, market forces will inflict further pain until either we hit rock bottom, or Covid-19 clears, whichever comes first, but it looks like the former.”
Since the start of the year, oil prices have plunged after the compounding impacts of the coronavirus and a breakdown in the original Opec+ agreement. With no end in sight, and producers about the world continuing to pump, that’s causing a fire-sale among traders who don’t have access to storage.
There are signs of weakness everywhere. Buyers in Texas are offering as little as $2 a barrel for some oil streams, raising the possibility that producers may soon have to pay to have crude taken off their hands. In Asia, bankers are increasingly reluctant to give commodity traders the credit to survive as lenders grow ever more fearful about the risk of a catastrophic default.
In New York, WTI for May delivery dropped as low as -$1.98 a barrel. It’s the lowest in continuation monthly data charts since 1946, just after World War 2, according to data from the Federal Reserve Bank of St Louis. Brent declined 6.5% to $26.22.
Crude stockpiles at Cushing — America’s key storage hub and delivery point of the WTI contract — have jumped 48% to almost 55-million barrels since the end of February. The hub had working storage capacity of 76-million as of September 30, according to the Energy Information Administration.
Despite the weakness in headline prices, retail investors are continuing to plough money back into oil futures. The US Oil Fund ETF saw a record $552m come in on Friday, taking total inflows last week to $1.6bn.
The price collapse is reverberating across the oil industry. Crude explorers shut down 13% of the American drilling fleet last week. While production cuts in the country are gaining pace, it isn’t happening quickly enough to avoid storage filling to maximum levels, said Paul Horsnell, head of commodities at Standard Chartered.
“The background psychology right now is just massively bearish,” Michael Lynch, president of Strategic Energy & Economic Research said in a phone interview. “People are concerned that we are going to see so much build up of inventory that it’s going to be very difficult to fix in the near term and there is going to be a lot distressed cargoes on the market. People are trying to get rid of the oil and there are no buyers.”
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