US oil prices sink as coronavirus fuels storage fears
The rout in US oil prices gained momentum 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 11.2 per cent to $11.33 per barrel in Asia trading hours. That decline came on the heels of a 25 per cent plunge in the price of the same contract overnight.
Extreme price swings have rocked global oil markets in recent sessions. Last week, WTI for May delivery fell to negative $40 a barrel, marking the first time in history that the price of an oil contract had fallen below zero.
Demand for oil has been pummelled by the economic impact of the coronavirus pandemic, alongside concerns a supply glut will overwhelm storage capacity.
“Capacity is becoming more and more of an issue Asia,” said Robert Rennie, Sydney-based head of market strategy at Westpac.
“We are approaching [the limit of] physical storage capacity around the world . . . [and] the point where floating capacity is also approaching its structural limits as well — and that has a depressing effect,” he added.
Volatility in crude markets has been exacerbated by exchange traded funds. The tumble in US prices overnight was driven by the world’s largest oil-backed ETF starting to sell off its positions in June futures contracts.
“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 also slid on Tuesday in Asia, falling 3.6 per cent to $19.28 per barrel. The international oil marker last week dropped below $20 a barrel for the first time in almost two decades.
Equity markets across Asia Pacific were largely unmoved by the oil sell-off.
Japan’s Topix was flat, while South Korea’s Kospi edged up 0.4 per cent and China’s CSI 300 added 0.9 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 this week are also focused on meetings 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.
Futures trading tipped the S&P 500 to open 0.3 per cent lower later on Tuesday. London’s FTSE 100 was poised to open 0.4 per cent higher, according to futures trading.