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WTI Hits Historic -$37 Per Barrel as Traders Offload Unstorable Oil

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Tank farm, Cushing, Oklahoma (File image courtesy Roy Luck, CC BY 2.0)

By The Maritime Executive 04-20-2020 06:01:25

The benchmark West Texas Intermediate oil futures market cratered into negative territory on Monday, with traders paying as much as $40 per barrel to dispose of unwanted American crude. 

The astonishing reversal in fortunes for U.S. oil producers is driven by the coronavirus pandemic, which has caused a rapid collapse in demand for fuels. With fewer drivers on the road, refiners have less incentive to buy and process oil, and American oil storage facilities are nearly full to the brim. Some holders of May-dated oil futures have nowhere (or nowhere affordable) to store the physical product. 

On Monday, many of these traders offloaded their May delivery contracts by paying "buyers" to take the oil off their hands. WTI futures hit an intra-day low of -$40.32 before closing at -$37.63 (-320 percent). It is the first time in history that the American oil benchmark has traded below $0. 

The June WTI contract fell by 15 percent to close at +$21.30. 

“Everyone is making a big deal about the precipitous decline in the May contract, but you have to take delivery if you own it. And as we all know, there’s nowhere to store it. The cost of storage drives the front-month contract negative when you factor in the storage cost. However, the fact that the June contract is beginning to roll over as well speaks in my mind to investors’ views of economic growth, or lack thereof," said analyst Louise Dickson of Rystad Energy in a research note. 

“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," said Michael Tran, the head of global energy strategy at RBC Capital Markets. 

"Today’s WTI sell-off has been brewing since last Wednesday when the EIA announced a record 19 million bpd crude build. Given this current pace, the remaining 21 million barrels of Cushing storage is almost certainly going to get filled up in May 2020. Now, it’s not a question of if, but when," said Rystad analyst Lefteris Karagiannopoulos in a research note. "The next logical step will be shut-ins and bankruptcies. If these materialize in the next month, then we can begin discussing optimism in June, but right now, given the likely low compliance of OPEC+ cuts by May 1, the optimism is not yet warranted, and we could see a repeat situation next month."

Reflecting traders' concerns about an oversupply, the international Brent benchmark closed down about eight percent to settle at +$25.91. Stock in the NYSE-listed offshore oil drilling companies also fell, including Transocean (-2 percent), Valaris (-5 percent), Seadrill (-5 percent), Diamond Offshore (-2 percent) and Noble (-5 percent). Out of these five firms, only Transocean is now valued at more than $1 per share.