Futures in New York slid as much as 30%, snapping a four-day recovery as the United States Oil Fund LP said it will move all the money it invested in the front-month June WTI oil contract starting today, triggering a massive swing in the price relationship between the June and July contracts.
“Some of this downward pressure particularly in the June contract is an increasing lack of liquidity,” said John Kilduff, a partner at hedge fund Again Capital LLC. This is not coming only from the USO, but also due to brokerage firms, like Marex Spectron and TD Ameritrade, restricting client’s abilities to add new positions to certain crude contracts, according to Kilduff.
“It’s going to exacerbate the whole marrying of the June contract with the over supplied physical conditions and the lack of storage,” Kilduff said.
While U.S. drilling is sliding and Saudi Arabia has started reducing output ahead of the start date for OPEC+ supply cuts, an immense surplus of oil means storage tanks are close to capacity around the world. South Korea, which holds the fourth-biggest commercial storage capacity in Asia, was said to have run out of onshore space.
Singapore’s coastline has become even more congested as the number of oil-laden tankers anchored offshore wait to be redirected to a willing buyer. Some vessels are being used to hoard fuel at sea as onshore tanks fill up.
With a number of producers commencing output cuts, some of the huge discounts seen in physical markets have eased, particularly in Europe. Swaps markets in the North Sea and Russia were trading stronger last week, though there’s still plenty of cause for pessimism.
On a global level, the swelling glut is set to test storage capacity limits in as little as three weeks, according to Goldman Sachs Group Inc., with traders, refiners and infrastructure providers seeking novel ways to hoard crude, including on tiny barges around Europe’s petroleum-trading hub, and in pipelines.
“After a turbulent week the market might have found the bottom, but prolonged price strength is not expected until global demand significantly improves,” said PVM Oil Associates analyst Tamas Varga. “These curtailments, as supportive as they sound, are already part of the supply-demand equation and are built in the price.”
There were tentative signs at the weekend that the coronavirus outbreak might be loosening its grip, with death tolls slowing by the most in more than a month in Spain, Italy and France. Reported fatalities in the U.K. and New York were the lowest since the end of March.
Saudi Aramco last week began curtailing daily output from about 12 million barrels to 8.5 million, according to a Saudi industry official familiar with the matter. OPEC+ has agreed to reduce production by about 9.7 million barrels a day in an effort to stem oil-price losses.
Negative WTI put options for June traded for the first time Monday, according to Nymex data.
