US crude oil futures turned negative on Monday for the first time in history as storage space was filling up, discouraging buyers as weak economic data from Germany and Japan cast doubt on when fuel consumption will recover.
Physical demand for crude has dried up, creating a global supply glut as billions of people stay home to slow the spread of the novel coronavirus.
Oil falls on concern over storage and earnings
The May US WTI contract fell $19.06, or 104.3%, to a discount of 79 cents a barrel at 2:09 p.m (1809 GMT) after touching an all-time low of -$1.43 a barrel. Brent was down $1.85, or 6.6%, at $26.23 a barrel.
The June WTI contract is trading more actively at a much higher level of $21.6 a barrel. The spread between May and June was more than $23, the widest in history for the two nearest monthly contracts.
Investors bailed out of the May contract ahead of expiry later on Monday because of lack of demand for the actual oil. When a futures contract expires, traders must decide whether to take delivery of the oil or roll their positions into another futures contract for a later month.
Nowhere to store crude
Energy traders fled from the expiring May US oil futures contract in a frenzy, sending the contract deep into negative territory for the first time in history, as barely any buyers are willing to take delivery of oil barrels because there is no place to put the crude.
Plunging crude prices pulled global equity markets lower and investors moved to the safety of US Treasury securities, pushing yields slightly lower as any risk of near term inflation all but evaporated with the price of spot oil cheaper than free.
“Today’s price move feels like oil is passing a kidney stone. A very painful move but it can’t last for long, since producers are switching off wells as we speak,” said David Winans, PGIM Fixed Income.
“The ‘supply shock’ from the OPEC+ collapse in March was really a mirage, the demand shock from Covid-19 is overwhelming everything. Ultimately, the path for oil prices is going to follow the path of this virus. Until demand shows some sign of life, oil prices will likely remain on life support.”
Kevin Flanagan, Head of Fixed Income Strategy for WisdomTree Asset Management New York, said “What the energy market is telling you is that demand isn’t coming back any time soon, and there’s a supply glut. Ordinarily, you’d be looking at oil as an inflation indicator, but then it turned into an economic-activity indicator. This price decline can be good if it means more people going to the pump, but that requires people getting out.”
“It’s hard to pinpoint where the market is focusing on this. Oil is running toward zero and stocks are down. But the 10-year US Treasury yield is essentially unchanged. So many factors into the note that oil prices don’t seem to be catalyzing any big moves to (Treasury) yields. People usually refer to price declines at the pump as tax cuts, but the Treasury market is saying we’re just going to sit tight.”
Scott Shelton, Energy Specialist United ICAP, said “The market is now understanding what the true meaning of ultra-low refinery runs, open blending arbs and full tanks. There is no bid for May WTI as there is no buyer and we have yet to see a significant reduction is a supply at Cushing to offset it.”