Oil prices here in the US plunged again this morning, with West Texas Intermediate (WTI) crude falling 31% to $12.43 per barrel. This is its lowest level since March 4, 1999.
With demand evaporating due to the coronavirus pandemic, producers are simply running out of places to store oil. This creates the real likelihood that they will be forced to scale back production in the coming weeks.
“Going forward, of course, we are going to have to see a lot of declines in production in the U.S. in order to push this thing a little bit higher,” said Samir Madani, founder of TankerTrackers.com.
“U.S. energy is very important for global energy security … because if it wasn’t for U.S. energy then prices would be a whole lot higher,” he added.
The May contract for WTI crude expires tomorrow. Meanwhile, the June contract is still trading at $23.58 per barrel. This indicates that traders expect oil prices to be higher in the future. This encourages them to store oil today to sell at a higher price at a later date. This situation is called ‘contango.’
The extreme price difference between the May and June contracts is unique, however.
Bjarne Schieldrop, chief commodities analyst at SEB, said in an email to CNBC: “The current forward crude oil curves for Brent and WTI are now in very deep contango, but the contango is also very front-loaded. The curves are saying we have a big problem with the storage of oil right now.”
Schieldrop added that the general market outlook is that we’ve reached the trough in demand this month. He also mentioned that things will improve over the second half of the year. He expects the oversupply to be worked through quickly as demand returns.
Will Oil Prices Improve?
Michael Lynch, president of Strategic Energy & Economic Research added “The historic contango is a reflection of physical barrels that can’t easily find buyers and are being sold at distressed prices. The implication is that storage might be more full than thought, or that buyers expect it to be very soon.”
Interestingly, Brent crude prices are just over $26 per barrel, holding up significantly better than WTI prices. This is due to Brent crude being a ‘waterborne’ crude. This means it is typically processed and stored within a very short distance of open water. With this, it’s easier to store on tankers and move around the globe to different storage facilities.
WTI crude is considered ‘landlocked’ crude, as it is processed and stored inland in the central US, making it difficult to move once storage capacity is reached.
“The U.S. situation is quite dire,” said Daniel Hynes, senior commodity strategist at ANZ.
“Clearly, being a relatively landlocked market there, we are seeing real pressure on storage as a consequence of the collapse in demand.”
At the Nymex oil delivery hub in Cushing, Okla., inventories are at 55 million barrels. This is according to Ryan Fitzmaurice, a commodity strategist at Rabobank. He points out that the all-time high was 69 million barrels back in April 2017. The “operational capacity” to be just shy of 92 million barrels. However, with roughly 5 million barrels being added per week, a new inventory record is just 3 weeks away. Also, capacity will be tapped out in a little less than two months.