Avi Salzman – Barrons – Oil futures plunged on Monday as an enormous oversupply of crude is building up at U.S. pipelines.
West Texas Intermediate futures fell 34% to $11.98 per barrel. Brent crude, the international benchmark, was down 5.6% to $26.51. Oil stocks were falling in premarket trading, with Exxon Mobil (ticker: XOM) down 5.4%. Halliburton (HAL), which reported earnings and announced new budget cuts on Monday, also fell 6.7%.
The drop in West Texas oil can partially be explained by technical trading patterns. The May futures contract expires on Tuesday, and as contracts get closer to expiration their prices tend to converge with spot prices. Crude spot prices have fallen into the single-digits at some U.S. pipelines like in the Bakken shale fields in North Dakota, because there is way too much supply and too little demand. At one Canadian pipeline, oil has even fallen below $0. Oil may be choppy over the next couple of days as traders shift focus to the June futures contract, which was trading at $22.43 and had higher volume than the May contract.
People are using much less oil than in the past because of stay-at-home orders around the country, forcing demand down by 20% to 30% around the world. Oil refiners, which take crude and turn it into products like gasoline, don’t want to pay for crude if there’s no market for gasoline or jet fuel because no one is driving or flying. Pipelines don’t want to take crude if they have nowhere to off-load it.
“I’m hearing about pipeline operators telling producers that they need proof that they’ll have a place to export the crude out of their pipelines to something—whether it’s a refiner a tanker or an export facility—before they take the crude on, because they don’t want the crude to get stuck in their pipe and become a source of storage too,” said Evercore analyst James West in an interview on Friday. “We don’t have storage anywhere for crude.”
While producers around the world have vowed to cut production to bring the market into balance, those cuts have mostly not happened yet and won’t be enough to solve the near-term issues anyway. This unique dynamic has forced the oil market into a steep contango, a trading pattern where investors will pay much more for oil set for delivery a year from now than they will for oil they can get today. (Brent crude isn’t dealing with the same level of contango, because crude storage near the Brent pipelines isn’t as clogged as it is in the U.S.) A year from now, coronavirus concerns are likely to have diminished, and people will be driving and flying again.
West Texas crude futures set for May 2021 delivery are trading for $35.