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Sunday, May 24, 2020

Oil rebounds from record wipeout with prices edging above zero

With the coronavirus pandemic bringing the US and much of the global economy to a standstill, processors are using far less crude, leaving so much unused oil sloshing around that American energy companies are running out of room to store it. And if there’s no place to put the oil, nobody wants a crude contract that is about to come due.

By: Bloomberg | Updated: April 21, 2020 6:58:09 am
A pumpjack operates on an oil well in the Permian Basin near Orla, Texas.

Oil rebounded in early Asian trading after plunging below zero for the first time in history as the U.S. benchmark’s May contract entered its final trading session.

Futures in New York traded at around $1 a barrel after sinking to as low as minus $40.32 a barrel during Monday’s jaw-dropping collapse. The June contract, however, which had trading volumes more than 30 times higher, rose to above $21 a barrel. The spread between the two reflects the growing fear that those who take physical delivery of crude in the near future may not find any outlet or storage for those barrels as refineries curb operations.

With the coronavirus pandemic bringing the US and much of the global economy to a standstill, processors are using far less crude, leaving so much unused oil sloshing around that American energy companies are running out of room to store it. And if there’s no place to put the oil, nobody wants a crude contract that is about to come due.

Oil prices have plunged as the coronavirus continues to infect more people globally, prompting stay-at-home directives and travel bans that have led to a collapse in consumption. The breakdown of the OPEC+ alliance in early March compounded the situation, while the subsequent output-cut agreement proved too little and too late in the face of a one-third collapse in global demand. 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.

“The May crude oil contract is going out not with a whimper, but a primal scream,” said Daniel Yergin, a Pulitzer Prize-winning oil historian and vice chairman of IHS Markit Ltd.

The extreme moves in West Texas Intermediate crude show just how oversupplied the U.S. oil market has become with industrial and economic activity grinding to a halt. Global benchmark Brent crude, by contrast, is still trading above $25 a barrel as demand in China, the world’s biggest oil importer, recovers.

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.

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 Plc.

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.

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The price collapse is reverberating across the oil industry. Even before Monday’s plunge, buyers in Texas were offering as little as $2 a barrel last week for some oil streams. 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.

”The background psychology right now is just massively bearish,” said Michael Lynch, president of Strategic Energy & Economic Research Inc. “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.”

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