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Published: April 18, 2020 at 10:59 a.m. ET, By Myra P. Saefong<\/p>\n
U.S. oil futures have dropped to their lowest since early 2002, but its the price spread between the front-month and future-month deliveries that\u2019s caught investors\u2019 attention this week.<\/p>\n
West Texas Intermediate crude prices for future delivery have risen well above the spot market\u2014a situation known as contango\u2014and that can encourage traders to store oil.<\/p>\n
\u201cThe historic contango is a reflection of physical barrels that can\u2019t easily find buyers and are being sold at distressed prices,\u201d Michael Lynch, president of Strategic Energy & Economic Research, told MarketWatch. \u201cThe implication is that storage might be more full than thought, or that buyers expect it to be very soon.\u201d<\/p>\n
The spreads on Tuesday between the front month and the contracts for later delivery were the largest since Feb. 12, 2009, according to Dow Jones Market Data, which tracked front month prices versus the next four months of future delivery prices. On that day, the front-month May West Texas Intermediate oil contract traded $14.45 a barrel below the September contract the data showed.<\/p>\n
\u201cThe term structure of all crude benchmarks moved to a super contango in March, as massive oil demand destruction, significant refinery cuts and rising global oil supply were expected to create a large surplus in the oil market,\u201d according to a monthly report from the Organization of the Petroleum Exporting Countries released on Thursday. \u201cThe market surplus was expected to reach around 15 [million barrels per day] in 2Q20, pushing prompt prices to decline much lower compared to longer-dated contracts.\u201d<\/p>\n
On Friday, May WTI crude, which expires at Tuesday\u2019s settlement, settled at $18.27 a barrel on the New York Mercantile Exchange. The June contract, which will become the front month at May\u2019s expiration, was at $28.08.<\/p>\n
Marshall Steeves, energy markets analyst at IHS Markit, points out that the May WTI contract is trading below $20, but it expires next Tuesday whereas June is trading in the mid-$20s\u2014and then the price curve moves back into the mid-$30s by the fall.<\/p>\n
The steepest supply cuts by the Organization of the Petroleum Exporting Countries and its allies, collectively known as OPEC+, \u201ctake place in May and June, when the shutdowns in the U.S. and elsewhere are expected to remain in place and then slowly be lifted,\u201d Steeves told MarketWatch.<\/p>\n
OPEC+ reached an agreement on April 12<\/a> to cut overall crude-oil production by 9.7 million barrels a day starting on May 1 through June 30 of this year. Total cuts would then decline to around 8 million barrels a day from July 1 through Dec. 31, followed by a smaller 6 million barrels in cuts from Jan. 1, 2021 to April 30, 2022.<\/p>\n Ahead of those reductions, nearby WTI oil futures have declined on the back of \u201cthe extension of the stay-at-home directives in the Northeast states and some other places,\u201d said Steeves, which would suggest a further fall in demand for oil.<\/p>\n Read: Nearby U.S. oil futures fall to lowest since 2001, pummeled as storage fears grow<\/a><\/p>\n Price spreads between nearby and deferred contracts for Brent crude, the global benchmark, aren\u2019t as wide as those for WTI. Front-month June Brent settled at $28.08 a barrel on Friday, while its October contract traded at $35.95.<\/p>\n \u201cBrent is a waterborne crude and not subject to the same storage constraints as WTI Cushing or WTI Midland\u201d oil, said David Winans, principal, U.S. investment-grade credit research at PGIM Fixed Income. \u201cWTI is a landlocked crude with fewer places to store, thus the front end price on WTI is getting clobbered the closer we go to \u2018tank tops\u2019.\u201d<\/p>\n Crude stocks at the Nymex oil delivery hub at Cushing, Okla. sit at 55 million barrels, according to Ryan Fitzmaurice, commodity strategist at Rabobank, in a Friday note, adding that the all-time high is 69 million barrels set back in April 2017, though operational capacity \u201cis stated to be just shy of 92 million barrels.<\/p>\n \u201cThis leaves 14mb before crude stocks at Cushing set a new record. and 37mb before max capacity is reached,\u201d Fitzmaurice said. \u201cAt the current pace of ~5mb build per week, crude stocks will be overflowing in Cushing in less than two months\u2019 time.\u201d<\/p>\n Adding to that dilemma, U.S. crude supplies have climbed<\/a> for 12 weeks in a row, with the increase of 19.2 million barrels reported by the Energy Information Administration for the week ended April 10 the largest weekly rise on record.<\/p>\n The supply gains come as demand is expected to see a record drop this year amid efforts to reduce the spread of COVID-19. The International Energy Agency estimated<\/a> a drop in demand of 9.3 million barrels a day this year, equivalent to a decade\u2019s worth of growth.<\/p>\n \u201cThe extreme contango is a reflection of market expectations that the current grossover supply in crude will work itself out,\u201d Winans told MarketWatch. However, \u201cnear term, the imbalance is so great that U.S. oil storage could be exhausted, which really drives near term prices lower.\u201d <\/p>\n