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US: Oil prices go "Negative" due to storage capacities

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US oil prices traded below zero for the first time ever, meaning producers or traders were essentially paying other market participants to take the oil off their hands. It is the clearest sign yet that the coronavirus pandemic, which has cut oil demand by up to a third worldwide, has turned the US oil market on its head. "The demand shock was so massive that it's overwhelmed anything that people could have expected."

The severe drop on Monday was driven in part by a technicality of the global oil market. Oil is traded on its future price and May futures contracts are due to expire on Tuesday. Traders were keen to offload those holdings to avoid having to take delivery of the oil and incur storage costs. The price crash came as the US benchmark oil contract, known as West Texas Intermediate, headed towards its expiry date for May delivery, the month where the demand hit from lockdowns and travel restrictions is expected to peak. Each month WTI future contracts, which trade on CME Group’s New York Mercantile Exchange, need to be settled with physical delivery of crude oil, giving a real-world link to one of the world’s most heavily traded derivatives. June prices for WTI were also down, but trading at above $20 per barrel. Meanwhile, Brent Crude the benchmark used by Europe and the rest of the world, which is already trading based on June contracts - was also weaker, down 8.9% at less than $26 a barrel. Mr Glickman said the historic reversal in pricing was a reminder of the strains facing the oil market and warned that June prices could also fall, if lockdowns remain in place.

Normally this happens each month without incident or drama. But Monday was different. Analysts believe a lack of available storage capacity at the WTI contract’s delivery point of Cushing, Oklahoma known as the Pipeline Crossroads of the World set off panic among traders still holding derivative contracts, who found themselves with nowhere to put the oil. WTI opened for trading on Sunday night at $18 a barrel. By the end of the day it had dropped to as low as -$40 a barrel. “With adequate storage in Cushing unavailable to those who need it, selling intensified,” said Ann-Louise Hittle at consultancy Wood Mackenzie. “This issue is most intense for May WTI because oil demand is at its weakest, with full coronavirus containment measures in place across much of the US. Storage at the Oklahoma facility is expected to be full within weeks.” As of April 10, Cushing’s tanks housed 55m barrels of crude, or 72 per cent of working storage capacity of 76.1m barrels, according to the Energy Information Administration. The remaining capacity was not necessarily available to those who had not already leased it. The oil industry has been struggling with both tumbling demand and in-fighting among producers about reducing output.

Earlier this month, OPEC members and its allies finally agreed a record deal to slash global output by about 10%. The deal was the largest cut in oil production ever to have been agreed. "It hasn't taken long for the market to recognise that the OPEC+ deal will not, in its present form, be enough to balance oil markets," said Stephen Innes, chief global market strategist at Axicorp.

 

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