The crude oil dock at the Port of Corpus Christi in Texas. Picture: REUTERS
The crude oil dock at the Port of Corpus Christi in Texas. Picture: REUTERS

Oil suffered its biggest one-day price plunge in the modern era, at one point crashing about 40% to below $11 a barrel as traders contend with a historic glut.

Despite Opec+’s unprecedented output deal agreed on a week ago, the oil market remains massively oversupplied as the lockdowns to fight the spread of the coronavirus reduce global crude demand by about a third. Storage tanks across the globe are rapidly filling, including at the key US hub in Oklahoma.

“There is no limit to the downside to prices when inventories and pipelines are full,” tweeted Pierre Andurand, the head of the eponymous oil hedge fund. “Negative prices are possible,” he added.

In early trading in New York, West Texas Intermediate fell to as low as of $10.96 a barrel, the weakest level since 1998. The plunge was exaggerated as the May futures contract expires on Tuesday, leading to a fire-sale among traders who don’t have access to storage.

The June contract fell 13% to $21.80 a barrel at 9.13am local time. Brent fell 7.1% to $26.08.

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. The nearest timespread for the US benchmark has fallen to its weakest level on record. Crude stockpiles at Cushing — the US’s key storage hub — 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.

Fund inflow

Despite the weakness in headline prices, retail investors are ploughing 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 fund has said it would move some of its WTI holdings into the July contract, citing regulatory and market conditions.

The price collapse is reverberating across the oil industry. Crude explorers shut down 13% of the US 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 price mechanism is a brutal but effective oil-market balancer,” said Bob McNally, founder of consultant Rapidan Energy Group and a former oil official at the White House. He warned prices could drop into “single digits in order to compel producers to shut their wells”.

Bloomberg

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