Pump jacks extract crude oil from oil wells. [File image used for illustrative purposes only] Image Credit: Bloomberg

Dubai: US crude prices plunged to their lowest level in history on Monday as traders continue to fret over a slump in demand due to the coronavirus pandemic. Starting at an already record low of below $5 late on Monday, the future contract prices started trading in the negative within the hour. US benchmark WTI oil price closed at -$37.63/barrel in New York.

Prices rebounded back above zero Tuesday, with US benchmark West Texas Intermediate for May delivery changing hands at $0.56 a barrel.

Space is scarce to store oil amid the current glut, meaning there have been few buyers for the commodity.

The May WTI contract closes Tuesday, and the contract for June delivery is now more actively traded. That enjoyed a modest increase Tuesday after heavy falls a day earlier, rising to above $21 a barrel.

On Monday, a technical oddity exacerbated the price plunge as traders fled the May futures contract ahead of its expiration tomorrow [Tuesday]. The following month's contract [June] fell 11 per cent to under $22.22 a barrel.

At 1.44 EDT (9.44pm Dubai time, April 20, 2020), the West Texas Intermediate crude stood at $2.12. Then WTI crude for May delivery tanked 94%, to $0.97, its lowest level on record.

Stocks plunge US stocks plunge as oil crushed below zero for first time

It dropped even further to a ridiculous 20 cents/barrel before starting to trade in the negative.

What is happening?

After beating the record low multiple times, West Texas Intermediate (WTI) for May delivery continued to sink to the unheard of price of a penny a barrel and below.

When a futures contract expires, traders must decide whether to take delivery or roll their positions into an upcoming contract. Usually this process is relatively uncomplicated, but the May contract's decline reflects worries that too much supply could hit the markets, with shipments out of OPEC nations booked in March set to cause a glut.

The June WTI contract is trading more actively at a much higher level of $21.6 a barrel. The spread between May and June was more than $23, the widest in history for the two nearest monthly contracts.

Investors bailed out of the May contract ahead of expiry later on Monday because of lack of demand for the actual oil.

Analysts said this month's agreement between OPEC and its peers to slash output by 10 million barrels a day was having little impact because of the virus lockdowns and travel restrictions that are keeping billions of people at home.

This latest plunge is threatening to erase an entire decade of demand growth, slashing thousands of jobs and wiping out hundreds of billions of dollars from company valuations.

Brent declined 5.8% to around $26.44. Brent Crude is more ubiquitous in the market, and most oil is priced using Brent Crude as the benchmark, at least to the tune of two-thirds of all oil pricing.

Reasons

There's no place to put it - we're running out of space to store oil. - Edward Moya, market analyst at OANDA in New York

Industrial and economic activity is grinding to a halt as governments around the globe extend shutdowns due to the swift spread of the coronavirus. Oil has faced its own knock-on effects with a market massively oversupplied and nowhere to put physical barrels of crude. An unprecedented output deal by OPEC and allied members a week ago to curb supply is proving too little too late in the face a one-third collapse in global demand.

"There is little to prevent the physical market from the further acute downside path over the near term," said Michael Tran, managing director of global energy strategy at RBC Capital Markets. "Refiners are rejecting barrels at a historic pace and with U.S. storage levels sprinting to the brim, market forces will inflict further pain until either we hit rock bottom, or COVID clears, whichever comes first, but it looks like the former."

"For many investors or people using these contracts for hedging this is really a big pain," said Edward Moya, market analyst at OANDA in New York. "There's no place to put it - we're running out of space to store oil."

Since the start of the year, oil prices have fallen by more than 90% after the compounding impacts of the coronavirus and a breakdown in the original OPEC+ agreement. With no end in sight, and producers around the world continuing to pump, that's causing a fire-sale among traders who don't have access to storage.

Signs of weakness everywhere

There are signs of weakness everywhere. Buyers in Texas were offering as little as $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 spread between the nearest two contracts for the U.S. benchmark has fallen to its weakest level on record. In Asia, bankers are increasingly reluctant to give commodity traders the credit to survive as lenders grow ever more fearful about the risk of a catastrophic default.

Crude stockpiles at Cushing - America's key storage hub and delivery point of the West Texas Intermediate contract - have jumped 48% 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.

Fund Inflow

Despite the weakness in headline prices, retail investors are continuing to plow money back into oil futures. The U.S. Oil Fund ETF saw a record $552 million come in on Friday, taking total inflows last week to $1.6 billion.

The price collapse is reverberating across the oil industry. Crude explorers shut down 13% 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 Paul Horsnell, head of commodities at Standard Chartered.

"The background psychology right now is just massively bearish," Michael Lynch, president of Strategic Energy & Economic Research Inc said in a phone interview. "People are concerned that we are going to see so much build up of inventory that it's going to be very difficult to fix in the near term and there is going to be a lot distressed cargoes on the market. People are trying to get rid of the oil and there are no buyers."