Oil prices tumbled anew Monday, falling near their lowest level since 1999 in the latest demonstration that traders are wary of holding crude with a global glut rapidly expanding.
Monday’s slide reversed a rebound from late last week, reflecting mounting skepticism that coordinated supply cuts by the Organization of the Petroleum Exporting Countries and allies will prevent the world’s oil storage from filling to the brim. Many North American producers are also being forced to curb output and shut in productive wells, but analysts say the moves are too little, too late.
U.S. crude futures for delivery in June slid 25% to $12.78 a barrel, dropping near a 21-year low from last week. The U.S. price benchmark started the year above $60.
Many investors are reluctant to hold oil-related investments after a futures contract for delivery next month last Monday tumbled below $0 a barrel, a first in oil-market history. Even though it recovered to expire in positive territory the following day, the crash illustrated the dangers of holding oil futures that expire soon.
When such contracts expire, they must either be sold or the holder must take delivery of a certain amount of oil by a date in the future. Traders say the dive below $0 was likely driven by investors unable to find available storage who were then forced to sell. The expiration of the made the June contract the earliest futures contract available to investors.
Traders said Monday’s selling showed investors fear a replay and now are trying to reduce their positions in near-dated oil futures.
“No one wants to be the person holding the bag,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Management. “They’re looking at where storage capacity is and saying it’s too close to call.”
The price crash below $0 “was too scary of an event for people not to have taken notice,” she added.
In another sign of investors’ anxiety about holding near-dated futures contracts, the
said in a Monday filing it will sell its positions in the June U.S. crude contract this week and purchase contracts several months in the future. The largest oil exchange-traded fund has roiled markets in recent weeks because it holds a sizable percentage of the near-dated futures contracts.
Before recent changes to the fund, those contracts would need to be sold each month before expiration and the ETF would purchase the next month’s contracts, resulting in heavy selling pressure. That would allow sharp-eyed traders to drive down the futures contract the ETF needed to sell and bid up the ones it needed to buy, profiting from the fund’s “roll” process each month.
The ETF’s price has also tumbled—on Monday, it fell 16% to $2.17—resulting in changes to its structure. Those include holding more contracts for dates several months into the future.
Investors could now anticipate the fund’s roll process again, since Monday’s filing said the ETF would be selling its June contracts on Monday, Tuesday and Wednesday.
Analysts are also closely watching supply cuts to see if they halt the weekslong crash. Starting Friday, globally coordinated cuts in production led by OPEC are set to kick in. Oil-producing nations have agreed to reduce output by 9.7 million barrels a day, approximately 13% of global supply.
Private-sector companies have already begun shutting off the taps.
closely watched weekly report on drilling activity released Friday showed that the number of active oil rigs in the U.S. dropped by 60 last week to 378—down by almost half since March 13.
The moves come after a March conflict between Saudi Arabia and Russia over market share drove up global supply at the same time the coronavirus pandemic dented demand. Oil’s recent swings should now push producers to act even faster to lower supply, investors say.
Brent crude, the global gauge of prices, slid 6.8% to $19.99 a barrel on Monday.
Negative oil prices were “the slap in the face that the market probably needed,” said Ben Luckock, co-head of oil trading at Trafigura Group. “The market was producing too much crude oil and people were just trying to hold on for a while.”
Producers—particularly in North America—likely have no choice now but to reduce output by about 10 million barrels a day in addition to the 9.7 million barrels agreed upon by major global oil-producing nations, according to Ehsan Khoman, head of Middle East and North Africa research at Mitsubishi UFJ Financial Group.
If storage facilities don’t overflow in May or June, analysts say prices could rebound later in the year. A pickup in Chinese oil consumption suggests demand could recover in the U.S. and Europe when lockdowns keeping billions of people at home are rolled back.
The amount of crude oil being processed by refineries in China has bounced from its lows in February, when swaths of the economy were shut down to contain the coronavirus.
In one sign of a demand recovery, independent refining in industry-heavy Shandong province recently hit record levels, according to Warren Patterson, head of commodities strategy at ING Groep.
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