After Going Negative Last Week, Oil Prices Slide Again
West Texas Intermediate prices recovered some after falling below zero last week. Unfortunately, prices are now dropping once again.
WTI fell by 27.7% on Monday, to $12.25 a barrel. The tumble comes after exchange-traded fund U.S. Oil Fund announced that it would sell all of its futures contracts for the month of June. Brent crude is less likely to experience losses of that magnitude, but still saw an 8.5% drop to $19.62 on Monday. One week ago, WTI futures fell to -$40.32 per barrel, going negative for the first time in history.
A major cause of price volatility is storage space. The primary storage space and delivery point for West Texas Intermediate is a tank farm located in Cushing, Oklahoma. Last week data showed that although the facility was at 70% capacity, whatever was left was either spoken for, or needed to maintain operations. With storage space used up, there is nowhere to store fresh supplies. Worldwide, suppliers are trying to find new ways to store excess supply, including on barges and in pipelines.
Until cars are on the road and flight schedules resume, there is little reason for that to change. Daily demand for oil is now down by nearly one third. United States crude inventories reached 518.7 million barrels in mid-April (the all time high is 535 million, in 2017). Goldman Sachs predicts that worldwide capacity to store oil could run out completely in the next three to four weeks, causing prices to go negative again, or for supply to simply come to a halt.
As prices continue to drop, fewer suppliers will be able to maintain production. Another 60 oil rigs fell out of use last week, marking six straight weeks of declines, according to the oil field service giant Baker Hughes. Active rigs now total 378, the lowest level since July 2016.
In mid-April, the OPEC+ group of countries agreed to cut production by 9.7 million barrels per day in May and June, in an attempt to prop up prices. Now Saudi Arabia, Kuwait, Azerbaijan, and Russia are reportedly reducing production ahead of schedule.
