NEW YORK – Oil suffered its biggest one-day price plunge in the modern era, at one point crashing about 40 per cent to below US$11 a barrel as traders contended with an historic glut.
Despite OPEC+’s unprecedented output deal agreed a week ago, the oil market remains massively oversupplied as the lockdowns to fight the spread of the coronavirus reduce global crude demand by about a third. Storage tanks across the globe are rapidly filling, including at the key US hub in Oklahoma.
“There is no limit to the downside to prices when inventories and pipelines are full,” tweeted Pierre Andurand, the head of the eponymous oil hedge fund. “Negative prices are possible,” he added.
In early trading in New York, West Texas Intermediate fell to as low as US$10.96 a barrel, the weakest level since 1998.
The plunge was exaggerated as the May futures contract expires on Tuesday, leading to a fire-sale among traders who don’t have access to storage. The June contract fell 13 per cent to US$21.80 a barrel at 9.13am local time. Brent declined 7.1 per cent to US$26.08.
There are signs of weakness everywhere. Buyers in Texas are offering as little as US$2 a barrel for some oil streams, raising the possibility that producers may soon have to pay to have crude taken off their hands.
The nearest timespread for the US benchmark has fallen to its weakest level on record.
Crude stockpiles at Cushing – America’s key storage hub – have jumped 48 per cent to almost 55 million barrels since the end of February. The hub had working storage capacity of 76 million as of Sept 30, according to the Energy Information Administration.
Despite the weakness in headline prices, retail investors are plowing money back into oil futures. The US Oil Fund ETF saw a record US$552 million come in on Friday, taking total inflows last week to US$1.6 billion. The fund has said it would move some of its WTI holdings into the July contract, citing regulatory and market conditions.
The price collapse is reverberating across the oil industry. Crude explorers shut down 13 per cent of the American drilling fleet last week.
While production cuts in the country are gaining pace, it isn’t happening quickly enough to avoid storage filling to maximum levels, said Mr Paul Horsnell, head of commodities at Standard Chartered.
“The price mechanism is a brutal but effective oil-market balancer,” said Mr Bob McNally, founder of consultant Rapidan Energy Group and a former oil official at the White House.
He warned prices could drop into “single digits in order to compel producers to shut their wells.”