By Barani Krishnan
Investing.com - Oil is marching to the storage beat. And it may be the only rhythm that matters as U.S. crude prices plunged more than 25%, reverting from a market that traders could not get enough of last week to one from which they can’t seem to flee quickly enough.
The United States Oil Fund (NYSE:USO), an exchange-traded fund known as USO and popular with retail investors of oil, accelerated the risk-off in crude as it unexpectedly moved to sell all its holdings in the most active West Texas Intermediate futures contract. That triggered a massive swing in the price relationship between WTI's front-month June and nearby July contracts.
U.S. crude inventories are poised to surpass in two weeks the 2017 record highs of 535 million barrels, if their average build rate of 16 million bpd over the past four weeks is maintained. The Cushing, Okla. delivery point for maturing contracts of WTI crude could be filled in under four weeks, if the average 4.5 million build over the last two weeks becomes a trend. U.S. production, meanwhile, has fallen by less than 1 million barrels daily over the past six weeks, sliding from a record high of 13.1 million daily in mid-March to 12.2 million bpd last week.
That’s not all. Floating crude oil storage is at an all-time high of 160 million barrels. Goldman Sachs (NYSE:GS) says the global market is on track to test storage capacity limits in as little as three weeks, requiring the shut-in of nearly 20% of world oil output.
“There is a backlog and a wall of crude that the market just can't look beyond as global storage hubs fill up,” said Phil Flynn, analyst at the Price Futures Group in Chicago. “Tankers filled with oil floating in the ocean with no place to go and producers cutting but not fast enough to overcome the most significant demand destruction event in the history of the globe.”
June WTI settled down $4.16, or 24.6%, at $12.78 per barrel.
Brent, the London-traded global benchmark for crude, slid $1.74, or 7%, to $23.07.
But not everything out there is bearish for oil.
Italy, the country worst impacted by the coronavirus prior to the United States, is looking to ease lockdowns from May 4 after an apparent peak in infections and deaths from the outbreak. New York, the U.S. epicenter of the pandemic, is also looking to reopen parts of its economy, following at least half a dozen of the 50 American states that have relaxed measures. The Dow responded by rising more than 1%.
And production cuts are coming. The much-anticipated production cuts by OPEC and its global allies officially begin on Friday. The GLOPEC arrangement has committed to cut at least 9.7 million barrels per day. Kuwait, OPEC's fourth-largest producer, says it has already begun cutting ahead of the group. So has Nigeria, because there's just nowhere to put any more of its oil. U.S. drillers have shed 305 oil rigs over six weeks, wiping out technically 45% of operating shale output.
In Russia, the industry is even considering resorting to burning oil as the fastest means to dispose of supply, sources told Reuters.
On the companies end, BP (LON:BP) reports quarterly earnings Tuesday, Shell (LON:RDSa) Thursday and ExxonMobil (NYSE:XOM) Friday, and all look set to slash capital expenditure.
Yet, all this may not be fast enough in a world losing between 20 million and 30 million bpd in demand. Time is of the essence and it's not on oil's side for the moment.
And that’s weighing on WT’s front month, June, which is trading at a contango, or discount, of more than $5 per barrel to July. Open interest in the spot contract has fallen nearly 255 million barrels over the past week. As of Monday, it was about 55 million barrels less in liquidity to the nearby July.
The shifting open interest signals investors’ preference to be in a “safer” contract that pledges to deliver oil later rather than sooner in a glutted market.
It’s also a sign that as expiry for the June WTI approaches in less than three weeks, the front-month could be in for another round of subzero prices — just as evidenced with the May contract, which expired last Wednesday.
In its Monday's change, the USO ETF said it was moving its money to contracts spread between July 2020 and June 2021 due to new limits imposed upon it by regulators and its broker. That significantly widened WTI's June-July spread, which has become a target for speculators.
“The ‘value’ for WTI is a lot different today than it was a month ago. WTI, was very expensive a month ago versus everything and is now much more fairly priced than it was,” said Scott Shelton, energy futures broker at IPAC in Durham, N.C. “But I am not ready to be long it as it’s not ‘cheap’ yet.”