The price of US oil slipped back below zero on Tuesday after plunging into negative territory for the first time in the previous session as the coronavirus pandemic crushed demand in global energy markets. West Texas Intermediate for delivery next month was trading at -$4.29 as trading began in Europe — meaning producers were continuing to pay buyers to take oil off their hands given limited access to storage. It closed Monday’s session at -$37.63, but climbed back above zero to reach $2.54 in Asian trade, before giving up its gains once again.
The negative prices were the latest sign of the crisis gripping the oil sector, with lockdowns implemented by authorities to smother the coronavirus outbreak having cut demand for crude by as much as a third.
“Yesterday . . . we saw one of the more remarkable moments in financial history and that is a deeply negative oil price — that is paying someone to take delivery,” said Jim Reid at Deutsche Bank. “This move is all about supply and demand. American energy users and refiners do not have the storage capacity given all that is going on.” The fall was partly the result of a market technicality, with Tuesday marking the final trading day of WTI futures contracts for delivery in May. A lack of capacity to store the crude at its delivery point in Cushing, Oklahoma as contracts came due left traders desperate to offload contracts rather than take on the physical product without anywhere to put it. Market attention now turns to the WTI contract for June delivery to see if the pattern persists. “A key question is whether we could see a repeat of this with the June expiry next month,” said Warren Patterson, head of commodities strategy at ING.
“It is likely that storage this time next month will be even more of an issue, given the surplus environment, and so in the absence of a meaningful demand recovery, negative prices could return for June.” The June contract was up 1 per cent at $20.64 in European morning trading, supported by hopes the worst of the demand erosion could ease by then if lockdowns and travel bans were loosened.
But traders warned a recovery could take time. “The Covid-induced evaporation in demand will keep the oil market under pressure,” said Tai Hui, chief Asia market strategist at JPMorgan Asset Management. Even if containment measures ease in the coming weeks, “the world is going to be awash in oil for some time,” he added. Brent crude, the international benchmark, was down 0.6 per cent at $25.43 a barrel after dropping almost 9 per cent on Monday.
Analysts at Citi warned that “if global storage worsens more quickly, Brent could chase WTI down to the bottom”. They added that WTI would remain volatile thanks to the continued difficulty of storage for US oil. European equities opened lower, partly dragged down by weaker energy stocks. The continent-wide Stoxx 600 was down 1 per cent, with its oil and gas sub-index dropping 3.3 per cent.
In London the FTSE shed 1.2 per cent, while Frankfurt’s Dax slid 1.5 per cent. Equities were also broadly lower in Asia, with futures tipping US stocks to fall 0.2 per cent when trading on Wall Street begins later. On Wall Street overnight the S&P 500 closed down 1.8 per cent, partly because of weakness in energy shares, but also due to increased pessimism over the time it will take for countries to emerge from lockdowns. In fixed income, the yield on the 10-year US Treasury was broadly stable at 0.61 per cent.
