US oil prices rebound but slip again into negative territory after record plunge

WTI's May contract collapsed rapidly – settling at -$37.63 per barrel on Monday – but regained some ground, while Brent is at an 18-year low

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West Texas Intermediate, the US oil benchmark, rebounded in trading on Tuesday but slipped back into negative territory after plunging to historic lows the previous day.

Brent, the international crude benchmark, fell to its lowest since 2002.

The May contract for WTI, which tracks North American crude grades, was in the single digits during early trading on Tuesday, but then fell to -$5.20 per barrel, up 86.18 per cent at 4.39pm UAE time after sinking to -$37.61 for the first time on Monday.

The plummet in price is largely due to storage capacity constraints and ebbing demand as a result of the coronavirus pandemic. Brent fell 19.05 per cent to $20.70 per barrel.

WTI’s June futures contract also continued to fall and was trading at $15.70 per barrel.

The US oil benchmark tumbled to as little as -$40 briefly on Monday before settling at -$37.63. It closed at $18.27 on Friday.

WTI’s spectacular collapse comes as the US is faced with a shortage of storage for crude, where a record supply from the shale boom has not been matched with adequate storage or pipeline infrastructure.

"Some may dismiss Monday’s fall into negative WTI prices as a quirk of the futures market on the last day before a contract ended," said Jim Burkhard, vice president and head of oil markets at IHS Markit.

"But the fact that prices went this low at all reflects brutal market forces that will not disappear with the expiration of a single monthly contract," he added.

The lowest oil prices had fallen previously was in 1931, when value plunged to $0.1 per barrel. Oil's crash on Monday is also blamed on small-time exchange-traded funds (ETFs), whose routine monthly roll-over was complicated by the fact that there were no takers for oil without booked storage at WTI's physical delivery point in Cushing, Oklahoma.

The demand crunch caused by the coronavirus pandemic has hastened the collapse in consumption as airlines stay grounded and people work from home, limiting the demand for crude products. Oil demand is set to contract by 29 million barrels per day in April, according to the International Energy Agency - the lowest since 1995.

Oil markets are “distorted” not broken as demand has fallen off the charts, Emirates NBD said in a note on Tuesday.

“While the descent of spot prices into negative territory is unprecedented in futures markets, the enormously wide contango in the WTI and Brent market structures gives another strong indicator of how distorted markets have become,” said Edward Bell, a commodity analyst at the Dubai-based bank.

Contango refers to a situation when spot prices for a commodity are lower than forward pricing.

Storage is near the brim, filling up more than 77 per cent of available total capacity. US crude is also constrained by the landlocked nature of production across its basins and limited offtake through pipelines, which constrains its ability to use floating storage as an option, unlike other producers.

The blow to the US oil industry comes after the country, which is the top global producer for oil and gas, agreed to join forces with Opec+ and the G20 exporters to cut production to stabilise the markets. The new alliance, which includes the US and G20 countries, is referred to as Opec++.

Oil worth less than nothing

Oil worth less than nothing

While US commitments remained unclear, the alliance touted a 20m bpd drawback from the markets starting in May. Opec+ alone is expected to cut 9.7m bpd in May and June, with tapered cuts in place until 2022.

But Gulf producers including Saudi Arabia and the UAE are bringing record production to the markets this month to honour commitments from before the historic pact.

On Tuesday Saudi Arabia's cabinet held discussions and reiterated the kingdom's "keenness to achieve stability in the oil market," according to a statement carried by the state-run SPA. The kingdom reiterated that it and Russia have a "firm commitment to implement agreed targeted cuts over the next two years ... and [are] prepared to take further measures jointly with Opec+ and other producers."

Sara Vakhshouri of SVB Energy said the negative market reaction to US crude was not indicative of the alliance’s efforts to balance the markets.

“This doesn’t reflect the Opec++ cuts, which are effective from May 1. Prices for June delivery are higher than May delivery,” she said.

“Also, the huge US oil price collapse [against others] is related to the quality of this oil, which is light and mostly yields jet fuel, gasoline, and diesel.”

Demand for these refined petroleum products has been hit the hardest by mobility restrictions in place to contain the Covid-19 pandemic.