By
David Hodari and
Joe WallaceUpdated April 20, 2020 9:04 am ET
Oil prices extended their declines Monday as storage space ran low for the glut of crude no longer needed by economies hard hit by the coronavirus.
The June contract for West Texas Intermediate futures, considered the benchmark for U.S. crude prices, dropped 11.5% to $22.14 a barrel. Brent crude oil, the global benchmark, fell 6.1% to $26.38 a barrel.
The fall was more dramatic for the front-month May contract, which fell 36.9% to $11.53 a barrel, near its lowest level since 1999. With the May contract expiring Tuesday and no longer the most actively traded, oil watchers don’t consider it the most accurate reflection of price action.
When futures contracts come close to expiration, their price typically converges with the underlying price of physical barrels of oil. Otherwise traders could profit from the difference between oil futures and oil barrels.
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Physical oil prices have been hit hard by the collapse in demand and surge in supply. The price of some regional crudes in the U.S. recently fell below $10 a barrel.
The drop in oil prices comes despite output reductions agreed between countries of the Organization of the Petroleum Exporting Countries and the Group of 20 nations.
“The deal was nowhere near enough to prevent us running out of storage,” said Hani Redha, a portfolio manager for PineBridge Investments. “That’s going to lead to a violent shutdown of production.”
Analysts expressed particular concern about ballooning inventories at Cushing, Oklahoma, a major hub for crude-oil trading in the U.S. Traders can make money by storing crude at Cushing for sale at a higher price in the futures market, according to Helge André Martinsen, senior oil market analyst at DNB Markets.
“Every barrel of oil is rushing to get there,” Mr. Martinsen said, referring to Cushing.
The swelling glut of oil has outweighed efforts by global oil producers to curb production. Data released Friday from oil-field services company Baker Hughes showed the largest weekly decline in active U.S. oil rigs since 2015. The overall number of rigs operating has dropped by a third over the past month.
Oil prices have collapsed this year, with governments across the world attempting to slow the spread of the coronavirus pandemic by banning travel and directing billions of citizens to stay in their homes. Those measures have prompted forecasts of a deep global recession and delivered an enormous hit to global oil demand. WTI and Brent prices have lost well over half their value in 2020.
“No [output] reductions can happen soon enough when we look at the price dynamic,” said Giovanni Staunovo, director at UBS Wealth Management’s chief investment office. The extra oil produced by Middle Eastern countries during the Saudi Arabia-Russia oil price conflict may not reach customers until May or June, he added.
The unusual market conditions are pushing investors to adjust their normal activity by trading futures contracts farther out in the calendar. There is a deep discount on oil available for delivery sooner rather than later, meaning investors lose money every time there is a new front-month contract, a situation analysts are referring to as a “super-contango.”ADVERTISEMENT
“Every time you switch contracts you have to pay for the new one and it’s destroying returns,” said Mr. Martinsen of DNB Markets. He points to popular exchange-traded funds that investors use to gain oil exposure. Some of them are using the July contract already. “That could lead to selling pressure on the June contract,” he said.
Write to David Hodari at David.Hodari@dowjones.com and Joe Wallace at Joe.Wallace@wsj.com
