US oil prices slide as coronavirus fuels storage fears

US oil prices fell sharply in volatile trading on Tuesday as concerns over storage capacity prompted fears the American crude benchmark could again plummet into negative territory.

The West Texas Intermediate contract for June delivery fell 20 per cent to a low of $10.07 a barrel in early London trading, before regaining some of that loss to trade around $12 by mid-morning. The volatility came on the heels of a 25 per cent plunge in the price of the same contract on Monday.

Extreme price swings have rocked global oil markets in recent sessions. Last week, WTI crude for May delivery fell to negative $40 a barrel shortly before expiry, marking the first time in history that the price of an oil contract had fallen below zero.

The coronavirus pandemic has reduced demand for oil by close to a third, raising concerns that a glut of unwanted supplies will overwhelm global storage capacity. Oil tanks have been filled up or booked out by traders, while the amount of crude and fuel being stored at vessels at sea has surged.

Robert Rennie, Sydney-based head of market strategy at Westpac, said the industry was approaching the limit of its storage capacity, including floating storage, which was having a “a depressing effect” on prices.

Traders said the only resolution will be for production to start shutting down or throttling back, but most oil companies are hesitant to make the first move. Oil-producer group Opec and its allies such as Russia are due to start cutting about 10 per cent of global supplies from early May — though that may be accelerated — but the size of the demand drop at the peak of lockdowns and travel restrictions is closer to 30 per cent of the normally 100m-barrel-a-day global market.

Volatility in crude markets has been exacerbated by exchange traded funds. The tumble in US prices on Monday was driven by the world’s largest oil-backed ETF starting to sell off its positions in June futures contracts, moving into contracts for later delivery.

S&P GSCI, one of the largest funds tracking a basket of commodities, said on Tuesday it would move all of its positions out of the June WTI contract at the close of trading — as long as they were not already in negative territory — adding a further wave of selling pressure.

“No one wants to be among the last to close out their position ahead of expiry, fearing a repeat of the May expiry,” said Warren Patterson, Singapore-based head of commodities strategy at ING. “The move we are seeing suggests that the June contract is going to become increasingly illiquid, and as a result, will likely suffer from increased volatility in the lead up to expiry.”

Brent crude for June delivery also slid on Tuesday, falling about 3 per cent to $20.50 a barrel. The international oil marker last week dropped below $20 a barrel for the first time in almost two decades.

Prices for physical cargoes in the spot market for delivery in the next couple of weeks are even weaker.

The price of dated-Brent, a physical benchmark based on a basket of North Sea crudes that is assessed by pricing agency S&P Global Platts, fell to $13.65 a barrel on Monday, down almost 15 per cent on the day — a sign that traders have little desire for cargoes anywhere in the world.

Equity markets in Europe shrugged off volatility in oil prices to push higher in Tuesday morning. The European benchmark Stoxx 600 added 1.3 per cent, while London’s FTSE 100 and Germany’s Dax gained 1.3 per cent and 1.4 per cent respectively. Futures trading tipped the US benchmark S&P 500 index to open up 1 per cent later in the day.

Equity markets across Asia-Pacific had also been largely unmoved by ructions in the oil market overnight. Japan’s Topix was flat, while South Korea’s Kospi edged up 0.6 per cent and China’s CSI 300 added 0.7 per cent.

Brokers said broad support from big central banks had provided some support for stock markets. The Bank of Japan on Monday said it would buy an unlimited amount of government bonds and keep interest rates low. Investors are also focused on meetings this week by the European Central Bank and US Federal Reserve.

On Wall Street overnight, the S&P 500 climbed 1.5 per cent in response to signs that some US states could soon begin resuming economic activity, suggesting a potential pathway for a gradual reopening of the world’s biggest economy.

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