US oil prices tumble, with May contract in negative territory
Oil prices ended US trade in the negative for the first time, as a supply glut forced traders to pay others to take the commodity.
An oil-price futures contract has tumbled into negative territory for the first time ever, illustrating the overwhelming glut of crude that is decimating the global energy industry.
The June contract for West Texas Intermediate futures, considered the benchmark for US crude prices, dropped 18 per cent to $20.43 a barrel. Brent crude oil, the global benchmark, fell 8.9 per cent to $25.57 a barrel.
But the fall was more severe for the front-month May contract, which made history by plunging into negative territory in the afternoon, a first in oil-futures-market data going back to 1983. It ended the day at minus-$37.63 a barrel, highlighting the dilemma facing energy companies. Producers in some parts of the world have to pay buyers to take oil away or store it.
Still, with the May contract expiring Tuesday and no longer the most actively traded, oil watchers don’t consider it the most accurate reflection of price action. When futures contracts come close to expiration, their price typically converges with the underlying price of physical barrels of oil. Otherwise, traders could profit from the difference between oil futures and oil barrels.
Physical oil prices have been hit hard by the collapse in demand and surge in supply. The price of some regional crudes in the US recently fell below $US10 a barrel and on Monday also sank below zero.
The drop in oil prices comes despite output reductions agreed on between countries of the Organisation of the Petroleum Exporting Countries and the Group of 20 nations.
“The deal was nowhere near enough to prevent us running out of storage,” said Hani Redha, a portfolio manager for PineBridge Investments. “That’s going to lead to a violent shutdown of production.”
Analysts expressed particular concern about ballooning inventories at Cushing, Oklahoma, a major hub for crude-oil trading in the US. Traders can make money by storing crude at Cushing for sale at a higher price in the futures market, according to Helge André Martinsen, senior oil market analyst at DNB Markets.
“Every barrel of oil is rushing to get there,” Mr. Martinsen said, referring to Cushing.
The swelling glut of oil has outweighed efforts by global oil producers to curb production. Data released Friday from oilfield services company Baker Hughes showed the largest weekly decline in active US oil rigs since 2015. The overall number of rigs operating has dropped by a third over the past month.
Oil prices have collapsed this year, with governments around the world attempting to slow the spread of the coronavirus pandemic by banning travel and directing billions of citizens to stay in their homes. Those measures have prompted forecasts of a deep global recession and delivered an enormous hit to global oil demand. WTI and Brent prices have lost well over half of their value in 2020.
“No (output) reductions can happen soon enough when we look at the price dynamic,” said Giovanni Staunovo, director at UBS Wealth Management’s chief investment office. The extra oil produced by Middle Eastern countries during the Saudi Arabia-Russia oil-price conflict might not reach customers until May or June, he added.
The unusual market conditions are pushing investors to adjust their normal activity by trading futures contracts further out in the calendar. There is a deep discount on oil available for delivery sooner rather than later, meaning investors lose money every time there is a new front-month contract, a situation analysts are referring to as a “super-contango.”
“Every time you switch contracts, you have to pay for the new one and it’s destroying returns,” said Mr. Martinsen of DNB Markets. He pointed to popular exchange-traded funds that investors use to gain oil exposure. Some of them are using the July contract already. “That could lead to selling pressure on the June contract,” he said.
Dow Jones Newswires