US crude oil prices dropped to another 18-year low near $18 a barrel on Friday, with energy markets still under pressure from a record glut created by the coronavirus pandemic.
Crude prices have fallen this week despite a landmark US-backed deal by the Opec+ group of producers to cut production by almost a tenth of global supply. But traders have weighed that the collapse in demand is still far larger — with up to a third of global consumption lost to measures to restrict the virus’s spread.
That has created volatile price moves as traders bet oil storage will rapidly fill up globally, including at the US crude benchmark’s delivery hub of Cushing, Oklahoma.
The front-month West Texas Intermediate contract for May delivery, which expires early next week, lost as much as 9 per cent to trade down to $18.03 a barrel, the lowest level since 2002. The second-month contract for June delivery was steadier, trading flat at about $25.53 a barrel. Brent, the international benchmark, was also steady at $27.84 a barrel, but it has lost almost $5 a barrel this week.
“With low liquidity close to expiry, these erratic moves tend to happen, but at the same time it is no wonder that WTI for May 2020 is seeing such low prices relative to the June 2020 contract,” said analysts at Rystad Energy.
“This is because the market knows that the US crude stocks will fill very rapidly, also in Cushing, Oklahoma, in the next few weeks as refinery runs continue to be cut tremendously in the US due to a lack of storage possibilities, especially for unsold gasoline.”
They added: “We believe US commercial crude stocks will be at all-time-high levels by the end of April, with continued builds expected into May as well.”
The huge price discount between contracts close to delivery and later contracts has raised concerns in the industry that futures contracts are disconnecting from underlying physical prices, partly because of a rush of retail investor money into exchange traded funds looking to pick the bottom in crude.
Those investors risk large losses as the nature of oil contracts, which unlike equities expire monthly, mean the ETFs need to sell the expiring front-month contract and buy the second to maintain their holdings, known as rolling positions.
But with a large price discount in the market’s current structure, investors lose a chunk of their money each month in the roll, meaning losses are possible even if crude prices gradually start to recover.
Hedge fund manager Pierre Andurand, whose specialist oil fund has made strong returns betting against crude this year, said on Twitter on Friday that the amount of buying in one oil ETF had been “staggering”, exceeding historical levels of long positions bought by funds during bullish market cycles.
“[I am] wondering how well those investors understand what can happen to the roll yield when inventories are full or close to full,” Mr Andurand said.
A large price discount between physical trades in the North Sea and the Brent contract has also emerged, with Dated Brent — a physical marker used to price oil deals worldwide — trading at close to a $10 discount to future prices in recent days.
This market structure, known as contango, is partly a result of record oversupply and is common when a glut of oil emerges, as contracts for later delivery need to price higher to cover the rising cost of storage. The size of the gap has led some to dub it “supercontango” as traders have been scrambling to snap up any onshore tankage available, while also chartering supertankers for floating storage to cope with the oversupply.
Saudi Arabia, which together with Russia agreed the Opec+ deal last week after coming under pressure from US president Donald Trump, has indicated it could make further cuts to output. Prince Abdulaziz bin Salman, Saudi Arabia’s oil minister, and Alexander Novak, his Russian counterpart, released a statement late on Thursday saying they were “prepared to take further measures jointly with Opec+ and other producers if these are deemed necessary”.
Mr Trump has supported the oil cuts despite his own long-running animosity towards Opec+ as the price crash threatens the future of the US shale industry. He has stopped short of committing to mandated cuts for US producers, but production is expected to fall sharply, possibly by 10 per cent or more, as drillers idle rigs and cut back on capital expenditure.
ConocoPhillips said on Thursday it would “voluntarily curtail” 225,000 barrels a day of production — almost a fifth of its recent total — across North America.