US oil futures continue to fall as supply overwhelms storage capacity

Saudi Arabia and Kuwait have begun implementing production cuts ahead of schedule in an effort to balance supply

Inventories at Cushing, the landlocked physical delivery point for WTI fell 3 million barrels last week, according to the EIA, easing concerns of limited storage capacity. Bloomberg

US crude futures fell below $15 per barrel, while Brent slipped below $20 as a supply influx continued to put pressure on storage capacity in the country, even as global producers downsized inventories.

West Texas Intermediate, a blend of light, sweet crude in the US, was down 26.09 per cent trading at $12.52 per barrel at 6.31pm UAE time, while Brent, the benchmark under which most of the physical oil in the world is traded, was down 8.02 per cent at $19.72 per barrel.

WTI's decline during the opening session revived fears that the benchmark, which slipped into negative territory for the first time last week, could fall back again into sub-zero levels.

Crude futures for May delivery plummeted to as low as -$40 per barrel the day before the expiry of the contract.

US crude's losses were compounded by exchange-traded fund activity after one of the biggest funds USO said it would sell its June futures position.

Oil's negative turn last week was exacerbated by small-time investors in ETFs who had little experience working at a time of strained storage capacity.

US crude has been hardest hit by the fall in demand resulting from the spread of the pandemic, which has forced governments to issue strict lockdown measures. The virtual standstill in land and air transportation has dealt a severe blow to the oil industry, which has been scrambling to find storage space for the excess oil. WTI futures for July also remain on a shaky footing, dropping $3 and trading at $18.22 per barrel.

Analysts remain wary of WTI's volatility, particularly as storage capacity at the benchmark's physical delivery point at Cushing, Oklahoma is close to saturation.

"Storage capacity is being tested like never before and if demand doesn't pick up in May, we're likely to hit negative prices again as we approach the next delivery date," said Jameel Ahmad, global head of currency strategy and market research at FXTM.

With countries in Europe and some states in the US looking to ease lockdown measures, a pick-up in demand is likely in May. April saw the worst demand decline since 1995, according to the International Energy Agency, which estimated a fall of 29 million barrels per day for the month alone.

"Whether it is enough to provide a boost to prices remains to be seen, but a slight pickup in demand along with the expected drop in supply may at least prevent prices from falling again into negative territory," said Mr Ahmad.

Meanwhile, Saudi Arabia said it had implemented production cuts that would reduce its output levels from 12.3m bpd for April to 8.5m bpd ahead of time. Kuwait announced last week that it had already begun cutting as part of the Opec+ pact to draw back 9.7m bpd in May and June.

Saudi Arabia and other Gulf producers brought record supply to the market in April and had planned to roll back output starting May 1. However, the slide in US and international crude futures prompted an early response to limit production.