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Traders may have hoped that the April 20 collapse in U.S. oil prices below zero for the first time in history was an aberration.
But on April 21 the whole global oil market woke up to the reality that the stomach-churning drop in expiring May futures might be a foretaste of what’s to come, as millions of barrels of oil go unused and the world’s tanks rapidly fill to the brim.
As West Texas Intermediate oil futures hurtled toward zero and then continued to fall to an almost unimaginable -$40 a barrel, it was easy to dismiss the collapse as a glitch caused by the expiry. The U.S. president did as much.
“It’s more of a financial thing than an oil situation,” President Donald Trump said April 20. The “squeeze” would be over in the “very short term.”
The tumble in the price of May futures came as investors scrambled to exit positions just a day before the contract was due to expire. Other benchmark oil prices remained at levels which — though painful for producers — were still squarely in positive territory.
And yet the fate of the May WTI offered a warning of the potential for jarring dislocations in the oil market as the coronavirus pandemic destroys demand for the world’s most important commodity.
Already by the morning of April 21, other oil prices were lurching lower. WTI for June delivery dropped as much as 42% to $11.79 a barrel, as the thinly traded May contract remained below zero. Brent crude slumped 19% to $20.81.
Analysts and traders say the oil market’s toughest period is likely to be the coming few weeks, as demand remains severely depressed by lockdowns around the world and a historic deal to cut production agreed by Saudi Arabia, Russia and other large producers has yet to kick in. Even when it comes into effect on May 1, the size of the reduction is dwarfed by the scale of the supply glut.
“The fate of the May contract yesterday exposed the painful fact that the recently agreed supply cuts do little to solve the near term oversupply problem in the global market,” consultancy JBC Energy GmbH said in a note.
Not Enough Space
Analysts at Citigroup Inc. estimate that crude oil stockpiles around the world are currently rising every week by more than 100 million barrels — more than the entire spare storage capacity in the U.S. Strategic Petroleum Reserve. They see a global surplus of 8-9 million barrels a day over the second quarter as a whole.
“I think June will be worse than May,” tweeted hedge fund manager Pierre Andurand. “Even though we will build inventories at a slower pace, we will still build significant amount of inventories during the month of May. Until we run out of space.”
Already, crude stockpiles at Cushing, Okla. — a key storage hub and delivery point of the WTI contract — have jumped 48% to almost 55 million barrels since the end of February, and could reach capacity in the next few weeks, according to analysts at Goldman Sachs Group Inc.
Elsewhere, storage also is rapidly filling up. Gerard Paulides, chief financial officer of the world’s largest independent storage company Royal Vopak NV, said in an interview that it had “almost completely sold out” of space in its tanks for storing oil.
That presages other moments of stress around the global market similar to the one just seen in the May WTI contract.
Most at risk is oil that is landlocked far from a port, and so reliant on finite storage capacity when demand from local refineries dries up. Beyond the U.S., that could include Russia, which typically ships a significant proportion of its crude by pipeline direct to European refineries.
To be sure, few expect many other oil contracts to see such deeply negative prices as the May WTI: no one would choose to sell so far below zero, meaning it is only likely to happen as a result of acute financial stress and specific contract issues.
Brent crude, the other global benchmark, is sold on to ships in the North Sea, offering more potential storage options that mean it’s less likely to suffer the kind of drastic negative pricing that WTI saw. What’s more, traders of Brent futures have the option to settle them in cash rather than by taking physical delivery, meaning the contract is not at risk from panic-selling by investors unequipped to receive barrels of crude, as happened on April 20 in the U.S.
But prices across the physical markets have already been trading far below futures prices for several weeks, and the cost of renting tankers — the usual last resort for storing oil when all other tanks are full — has skyrocketed.
Euronav NV, one of the world’s largest owners of supertankers, is anticipating no let-up in a surge in rates for the vessels because so many of them are being used to store oil.
“We think that it will go higher and higher, simply because there are more and more ships which are being taken out of the fleet for storage purposes,” Chief Executive Officer Hugo de Stoop said in an interview on Bloomberg TV.
Ultimately, to balance the market, more crude production may be forced to shut. For companies and oil-dependent countries, it means more pain lies ahead.
As Trump put it: “If the market is the way it is, people are going to slow it down or they’re going to stop. That’s going to be automatic. And that’s happening.”
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