• Friday, May 10, 2024
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US oil price crashes to record low as coronavirus hits demand

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US oil prices crashed below $5 a barrel on Monday, hitting the lowest level since the contract launched in 1983, as the collapse in demand triggered by the coronavirus pandemic leaves the world awash with crude that it is struggling to store.

West Texas Intermediate, the US marker, lost 74 per cent on Monday, sinking to a low of $4.04 a barrel, on warnings that storage could fill up within weeks — including at the benchmark’s delivery hub of Cushing, Oklahoma.

Lockdowns imposed in many of the world’s major economies have sent crude demand tumbling by as much as a third, leaving the industry facing what Jefferies analyst Jason Gammel called perhaps “the bleakest oil macro outlook” he had ever seen.

Physical grades in many North American regions have fallen into the low single digits — with some contracts changing hands for as little as $2 a barrel — reflecting a dearth of buyers able to take delivery, even as prices for later contracts have held up marginally better due to some investors betting on an eventual rebound.

In Canada, spot prices for Alberta’s heavy oil, which sells at a deep discount to WTI, traded at below minus $6 a barrel in the spot market, according to traders and brokers.

The possibility of negative prices for the main US grades is growing, with the prospect that producers could pay traders to take oil off their hands to try and forestall the shutdown of fields ahead of their rivals.

Stephen Schork, editor of oil-market newsletter The Schork Report, said he expected access to storage capacity in the US to be exhausted within the next two weeks — and cautioned that the collapse of the country’s oil consumption was accelerating.

“It just gets uglier from here,” Mr Schork said, adding that sharply rising unemployment numbers meant fewer and fewer Americans would be driving, hurting petrol demand even during its peak summer months.

“This summer is dead on arrival. The biggest demand months are not going to happen,” he said.

Part of the rapid decline in WTI prices reflects technicalities around the contract for oil to be delivered in May, which expires on Tuesday while short-term storage issues are severe. Still, WTI for June delivery was also down 10 per cent at $22.62, while Brent crude, the international marker, dropped 5 per cent to $26.72.

Traders said contracts for later delivery were being propped up by hopes the worst of the demand destruction could be passed by the summer if lockdowns and travel bans are eased. But others are questioning whether the record-breaking gaps between spot sales and future prices are sustainable.

“The May contract expires tomorrow so volume on it is going to be very light. The June contract is more reflective of the changes,” said Olivier Jakob at Petromatrix. “That being said, oil is very weak . . . The big thing right now is destruction of demand due to the virus.”

Wall Street opened lower, dragged down by weakness in energy stocks. The S&P 500 was down 0.5 per cent in New York. The sub index for energy was off 4.5 per cent.

European indices steadied, with the continent-wide Stoxx 600 closing 0.7 per cent higher, while London’s FTSE 100 and Frankfurt’s Dax gained 0.45 per cent.

Crude prices have plummeted this year on the possibility that the coronavirus outbreak will cause a deep global recession. The number of Covid-19 infections worldwide topped 2.4m as of Monday, according to Johns Hopkins data, with more than 165,000 dead.

The latest developments “painted a grim picture of a world still firmly in the grip of the coronavirus crisis, amplifying worries about sinking oil demand”, said Vandana Hari, founder of Vanda Insights, a Singapore-based energy research firm.

The deepening fall in oil prices has come despite an Opec-backed deal to cut roughly 10 per cent of global crude supply. Reductions of varying magnitude are planned to run until April 2022 as part of efforts to stabilise prices.

Baker Hughes data on Friday showed that the number of active oil rigs in the US has dropped by more than a third over the past month. But signs of curtailed US supply have done little to boost prices.

“Too much oil, with nowhere to put it,” said Kit Juckes, a senior strategist at Société Générale in London, noting that “oil-sensitive currencies are under pressure again”.

Equity markets in Asia came under pressure earlier in the session. Japan’s benchmark Topix fell 0.7 per cent and Australia’s S&P/ASX 200 shed 2.5 per cent, while Hong Kong’s Hang Seng was flat.

In fixed income, the yield on the 10-year US Treasury was little changed at 0.623 per cent.