U.S. crude takes historic plunge

CALGARY North American oil traders witnessed a historic collapse into negative territory for West Texas Intermediate oil prices on Monday, and braced for extreme volatility for the rest of the week as the commodity reacts to weakening global demand and rapidly filling storage locations around the world.

Analysts say the collapse in expiring U.S. oil futures for May contracts triggered the downward spiral as traders piled into June contracts, leaving no buyers for the month a day before the close of the trading window.

All of a sudden, the fairly normal logistical roll of the forward curve becomes a ... phenomenal event.

The May 2020 contract, which ends on Tuesday, was eviscerated as the remaining storage capacity at Cushing, Okla., of 21 million barrels is expected to fill up in the coming weeks, leading to more pressure on WTI spot prices in the near term, Rystad Energy said.

The May U.S. WTI contract fell US$55.9, or 306 per cent, to settle at a discount of $37.63 a barrel after touching a record low of -US$40.32 a barrel.

Brent crude benchmark was down nine per cent, to settle at US$25.57 a barrel.

At the same time, a barrel of Western Canada Select — which normally trades at a discount to WTI — closed at US$9.22 per barrel, down 17.09 per cent on the day.

The situation is likely to be short-lived, but it marks the beginning of what analysts and traders believe will be a highly volatile next few days for the commodity.

“Nobody is paying us to take their crude away,” said one crude oil trader with a refining company on Monday, as WTI plunged and after WCS briefly traded at -1 U.S. cent in the futures market Sunday night.

The person, who spoke on condition of anonymity, said that WTI prices for physical delivery are based on the average value of contracts traded in a month, and are set over a month ahead of time.

As a result, the historic depths WTI fell to on Monday would affect the May average price but traders are already looking past that and eyeing oil deliveries for June.

Indeed, a barrel of WTI crude oil delivered in June continued to trade at US$22 per barrel on Monday.

The market could be in for a similarly historic upswing later this week.

Analysts say the volatile oil trading in the futures market was also partially a result of oil storage tanks in Cushing filling up.

“All of a sudden, the fairly normal logistical roll of the forward curve becomes a fairly phenomenal event,” said Rory Johnston, managing director and market economist at Toronto-based market research firm Price Street. “Fundamentals are extremely weak and storage is extremely rare.” Financial Post