Oil futures plunge below zero for the first time on coronavirus turmoil
Oil futures collapsed to below zero for the first time 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 around the globe extend shutdowns due to the swift spread of the coronavirus.
An unprecedented output deal by oil cartel Opec and allied members a week ago to curb supply is proving too little too late in the face of a one-third collapse in global demand.
On Monday, a technical oddity exacerbated the price plunge as traders fled the May futures contract ahead of its expiration on Tuesday. The following 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. 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 effects of the coronavirus and a breakdown in the original Opec+ agreement.
With no end in sight, and producers around the world continuing to pump, there is a fire sale among traders who do not 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 negative $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, the US’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 barrels as of September 30, the Energy Information Administration says.
Despite the weakness in headline prices, retail investors are continuing to plough money back into oil futures. The US Oil Fund exchange traded fund 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.
MASSIVELY BEARISH
Crude explorers shut down 13% of the American drilling fleet last week. While production cuts in the country were gaining pace, it was not 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.
“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 of distressed cargoes on the market. People are trying to get rid of the oil and there are no buyers.”