US crude futures continued their slump, falling as low as $10.63 per barrel in intra-day trading on Tuesday as the biggest oil exchange traded fund sold its holdings in the current monthly contract.
West Texas Intermediate, the benchmark for US crude, was down 12.6 per cent trading at $11.17 per barrel at 3.42pm UAE time, reviving fears that it could plunge below sub-zero levels seen last week.
The United States Oil Fund, administered by the Bank of New York Mellon, which tracks near month front contracts, has changed its investment position multiple times over the past two weeks.
The spread between WTI's next monthly contract has widened, with futures for July trading at $18.34 per barrel.
Brent, the international oil benchmark, under which two-thirds of the world's physical oil is traded, was down 0.67 per cent at $19.87 per barrel.
The gauge, impacted by WTI's nosedive, slipped below $20 on Monday.
"Oil prices at a multi-year low are pushing the rebalancing of the oil market into the most painful phase for producers," said Giovanni Staunovo, commodity analyst at Swiss bank UBS.
The bank estimates on-land oil inventories have increased by nearly 132 million barrels over the past four weeks globally. Floating storage, meanwhile, has increased by 60m barrels. Storage space is already exhausted in some locations such as Estonia with WTI's physical delivery point at Cushing, Oklahoma set to reach its capacity limits in May.
"With limited storage buffers, forced production shut-ins are needed," said Mr Staunovo.
Production shut-ins amounting to 2.32 million barrels per day (m pbd) have already been brought into effect as of April 24, according to Wood Mackenzie. Total shut-ins are expected to exceed 5m bpd by the end of the second quarter.
Oil producers, as part of the Opec+ pact, have already begun cutting back output ahead of the May 1 kick-off. Saudi Arabia is rolling back production from a record 12.3m bpd to 8.5m bpd, while Kuwait has also started cutting back to rebalance inventories.
The producers agreed to trim 9.7m bpd of output for two months starting May, with tapered cuts in place until 2022.
Meanwhile, fund flows are likely to exert substantial pressures on nearby WTI oil prices, with the consequences likely to spillover onto the broader market, noted Julius Baer.
The ETF activity remains a "short-term distortion" with no lasting impact.
Speculative money has been a mover of prices, but also offers significant liquidity to the industry to hedge against risks, said Norbert Rücker, head economics and next generation research at the bank.
"Although the paper oil market has massively grown in value, it is still outsized by the physical oil market in terms of oil stored, produced and consumed," he added.
The bank maintains an optimistic outlook and expects a price recovery in the longer term from $20 per barrel.
