The price of oil slumped again on Monday as the imbalance between too much supply and not enough demand continues to grow.
The North American oil benchmark, known as West Texas Intermediate, lost more than a third of its value, falling to $12.57 US a barrel.
That’s the going rate for a barrel of oil to be delivered in June, which is currently the most commonly traded contract on the futures market that serves as a proxy for the value of actual oil.
That market was plunged into chaos last week as the futures price for May oil dipped below zero at one point. While that was dismissed as a glitch caused mainly by the expiry of the May contract, the June oil contract is moving steadily lower as the market is finding it harder and harder to justify prices for oil at a time when there is far more being produced than can be used or stored at the moment.
May’s temporary price crash was caused by traders scrambling to offload contracts for oil before the deadline to actually receive it came, because data suggests storage tanks are filling up fast.
Data from the U.S. Energy Information Administration suggests there were 518 million barrels of oil in storage in the U.S. last week, close to the all-time high of 535 million reached in 2017.
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The Organization of Petroleum Exporting Countries (OPEC) last month agreed to cut production by up to 10 million barrels a day, but current indications suggest global demand for oil has fallen by almost 25 million barrels a day because of the economic devastation caused by COVID-19.
That’s leading to lower and lower prices for crude as producers discover it’s a buyer’s market for their product.
“As global inventories become more and more saturated, it is becoming increasingly difficult for crude oil producers as well as refineries to find buyers or places to store their crude or products,” commodities analyst Bjarne Schieldrop, of Norwegian firm SEB, said in a note Monday.
Oil contract could go negative again
The May oil price going negative last week was dismissed as a trading glitch, but even beyond the fundamentals of supply and demand, there are signs that June’s contract is under similar technical pressure. The world’s biggest oil-backed exchange-traded fund said Monday it plans to dump its entire stake of contracts for June oil delivery — more than $700 million worth of oil.
The United States Oil Fund said in a filing it will still buy and own contracts for oil to be delivered later in the year, but in the short term, the dumping of the June contract was a major factor in the sell-off.
Couple that with continuing storage concerns, and it was a recipe for heavy selling.
“The current oil balance is simply awful, and no improvement is anticipated until after June due to [the] massive fall in global oil demand,” said Tamas Varga, with oil brokerage TVM.
That could lead to a return to sub-zero prices again soon.
Schieldrop said a supertanker full of oil left Houston last week bound for Asia where, based on the contract, the implied price of the actual crude on the tanker was just 75 cents US per barrel. “The whole cost for the Asian buyer … was the freight cost,” he said.
Bjornar Tonhaugen, head of oil markets for Norway’s Rystad Energy, said the market knows the storage problem means the industry is “on a calculated path to reach tank tops in weeks.”
“Prices can’t do anything else but decline when producers won’t have anywhere to store oil soon.”