Doha, April 2020
U.S. Oil Futures - The Only Way Is Up
Traders desperate to avoid owning oil, fled the markets yesterday, sending crude futures into negative territory for the first time ever. With the unprecedented drop in global oil demand due to the coronavirus pandemic, there is not enough storage for the massive glut of oil present on U.S. soil.
Investors sold the May futures contract, due to expire today, in a series of waves. At one point the contract hit -$40 a barrel. When the trading stopped, crude oil ended the day at a -$37.63 a barrel, a decline of a massive 305%, or $55.90 a barrel.
For as sudden as the day's declines were, it was weeks in the making. The coronavirus pandemic cut fuel demand worldwide by roughly 30% beginning in early March, but for several weeks, the supply of oil worldwide has continued to build. Even the recent deal by OPEC and other major oil- producing countries to reduce supply will not be fast enough, nor large enough, to drain the millions of barrels of unwanted crude present in the markets.
The surplus oil is instead going into storage. However, in the United States, storage is filling much more quickly than anticipated. Cushing, Oklahoma, the tiny town of less than 10,000 people that serves as the main U.S. storage hub, was 70% full as of last week, and traders predict it will be 100% full within two weeks.
That realisation sparked yesterday's sell-off in U.S. futures markets because of the technicalities of the West Texas Intermediate (WTI) futures contract, which expires on Tuesday. Each futures contract is for 1,000 barrels of crude oil, and when oil contracts expire, the holder takes possession of every contract they own, delivered to Cushing. Still, with Cushing filling up, that leaves traders with the unattractive option to take oil they do not need, or to get out of those positions. The rush for the door meant there were few buyers, and contracts dropped from a normal price of $18 on Friday, into unparalleled negative territory.
For the first few hours of trading yesterday, the May oil futures steadily edged lower, widening the gap between May’s and June’s contracts, which, while weak, still ended the day at more than $20 a barrel. Nevertheless, with expiration on the way today, selling accelerated in the last two hours of trading yesterday, with oil finally hitting negative territory, roughly 20 minutes before the close of trading.
Once that level was breached, sellers piled in, sending the contract, at one point, below -$40 a barrel, before a slight rebound ended what will go down as the worst day since the WTI contract was introduced in 1983. For June Futures, “up” seems the only way from here, although the market is still severely unbalanced.