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Oil drops to 21-year low with storage filling as demand shrivels

Spread widens as global benchmark falls a lot less than WTI.
Oil storage tanks in Cushing, Oklahoma. Image: Daniel Acker/Bloomberg

Oil extended its slide, falling to the lowest in more than two decades, on concern the world is rapidly running out of places to store crude after output cuts proved insufficient to cope with plunging demand.

Futures in New York fell 15% to less than $16 a barrel after losing almost a fifth of their value last week as the deal by OPEC+ and other producers failed to counter the demand hit from a crippled global economy. The current May contract expires Tuesday, however, with the more active June futures falling by around a third as much on more than five times as much trading volume. Global benchmark Brent crude was only down around 1%.

Near-term prices for West Texas Intermediate, the US benchmark, are trading at huge discounts to later-dated contracts on concern the storage hub of Cushing, Oklahoma, will fill to capacity. That has seen prices disconnect from Brent futures in London. Buyers in Texas are offering as little as $2 a barrel for some oil streams, raising the possibility that American producers may soon have to pay customers to take crude off their hands.

The 9.7 million barrels a day of production cuts agreed by OPEC+ are paling in comparison against this backdrop. China reported its first economic contraction in decades on Friday, an indicator of what’s to come in Europe and North America, which have yet to emerge from coronavirus-driven lockdowns. There were some signs of optimism, however, as death rates eased in New York and some of the hardest-hit European countries.

“The current prices show that the OPEC+ cuts proved to be a blip, with oil prices at the mercy of the virus once again,” said Vandana Hari, founder of Vanda Insights in Singapore. “Until we approach a lifting of the lockdowns in the U.S,, oil may drift lower or remain rangebound around current levels.”

WTI for May delivery fell 15% to $15.54 a barrel on the New York Mercantile Exchange as of 10:25 a.m. in Singapore after plummeting 20% last week. It dropped to as low as $14.47, the weakest since March 1999. The June contact declined 5.4% to $23.69.

Brent for June delivery fell 0.9% to $27.83 a barrel on the ICE Futures Europe exchange after losing 10.8% last week. It traded at a $4.11 premium to WTI for the same month.

Concern continues to mount that storage facilities in the US will run out of capacity, with stockpiles at Cushing rising almost 50% since the start of March, Australia & New Zealand Banking Group said in a note. “We hold some hope for a recovery later this year.”

The price collapse is reverberating across the oil industry. Crude explorers shut down 13% of the US drilling fleet last week as the swelling worldwide glut of crude spurred drastic cost-cutting and project cancellations among drillers.

Meanwhile, in the Asian oil hub of Singapore, Hin Leong Trading  filed for court protection from creditors amid revelations it hid around $800 million in losses racked up in futures trading.

“The output cut that we’ve seen, or supposed to see coming, isn’t sufficient to cover the 25 million to 30 million barrels of daily demand that’s being destroyed by Covid-19,” said David Lennox, resource analyst at Fat Prophets in Sydney. “We have to see a peak for Covid-19 globally to get a clearer picture of how much demand will be destroyed.”

More oil-market news

  • Hedge funds were wrong again after betting for a second straight week that oil’s spectacular crash had bottomed out.
  • A Nigerian oil-industry union called off plans for a strike that threatened the country’s crude exports, after authorities released workers accused of breaking rules aimed at containing the coronavirus.
  • Crude futures fell 5.1% to 240.8 yuan a barrel on the Shanghai International Energy Exchange after dropping 12.5% last week.

© 2020 Bloomberg

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Hitting the oil barons and their military industrial complex acolytes where it hurts most, well below the belt @<$30/ barrel!! #keepitcoming #fightdirty #suckitupcorona

This might very well in time be what drives inflation down or cause deflation like the great depression.

Contrary to popular believe deflation is not good for your economy.

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