Oil Slides After Crude ETFs Move Into Later-Dated Contracts
Trucks pass crude oil storage tanks outside Midland, Texas, U.S. (Photographer: Matthew Busch/Bloomberg)

Oil Slides After Crude ETFs Move Into Later-Dated Contracts

(Bloomberg) -- Oil fell after the biggest oil ETF said it would sell out of its June WTI futures position as physical oil storage levels continue to balloon.

Futures in New York slid as much as 30%, snapping a four-day recovery as the United States Oil Fund LP said it will move all the money it invested in the front-month June WTI oil contract starting today, triggering a massive swing in the price relationship between the June and July contracts. At the same time, the global oil market is on track to test storage capacity limits in as little as three weeks, requiring the shut-in of nearly 20% of global production, according to Goldman Sachs Group Inc.

“Some of this downward pressure particularly in the June contract is an increasing lack of liquidity,” said John Kilduff, a partner at hedge fund Again Capital LLC. This is not coming only from the USO, but also due to brokerage firms, like Marex Spectron and TD Ameritrade, restricting client’s abilities to add new positions to certain crude contracts, according to Kilduff.

“It’s going to exacerbate the whole marrying of the June contract with the over supplied physical conditions and the lack of storage,” Kilduff said.

While U.S. drilling is sliding and Saudi Arabia has started reducing output ahead of the start date for OPEC+ supply cuts, an immense surplus of oil means storage tanks are close to capacity around the world. OPEC+ expressed frustration by the lack of oil cuts by other nations. Equatorial Guinean Oil Minister Gabriel Obiang Lima said on a conference call that producers such as the U.S., Mexico and Norway need to chip in with supply cuts.

Oil Slides After Crude ETFs Move Into Later-Dated Contracts

In order to avoid Cushing storage from becoming over 90% full in May and June, total production shut-ins would have to equate to 1 million barrels a day in May, according to a JPMorgan Chase & Co. note. A further 500,000 barrels a day of shut-ins may be needed in June as well, the report said.

South Korea, which holds the fourth-biggest commercial storage capacity in Asia, was said to have run out of onshore space. Singapore’s coastline has become even more congested as the number of oil-laden tankers anchored offshore wait to be redirected to a willing buyer. Some vessels are being used to hoard fuel at sea as onshore tanks fill up. At least three tankers from Baltic and Black Sea ports with a combined 280,000 tons of Urals is heading to Malaysia, likely for storage, according to ship tracking data compiled by Bloomberg.

  • WTI for June delivery lost $4.16 to settle at $12.78 a barrel in New York.
  • Brent for June settlement fell $1.45 to $19.99 a barrel. Options for that month expire on Monday.
  • Dated Brent, a reference for nearly two-thirds of the world’s physical oil flows, declined to $16.01 on Friday from $16.30, according to traders monitoring prices on S&P Global Platts

With a number of producers commencing output cuts, some of the huge discounts seen in physical markets have eased, particularly in Europe. Swaps markets in the North Sea and Russia were trading stronger last week, though there’s still plenty of cause for pessimism. On a global level, the swelling glut is set to test storage capacity limits in as little as three weeks, according to Goldman Sachs Group Inc., with traders, refiners and infrastructure providers seeking novel ways to hoard crude, including on tiny barges around Europe’s petroleum-trading hub, and in pipelines.

There were tentative signs at the weekend that the coronavirus outbreak might be loosening its grip, with death tolls slowing by the most in more than a month in Spain, Italy and France. Reported fatalities in the U.K. and New York were the lowest since the end of March.

View the latest market-moving news and analytics surrounding volatile crude prices from BloombergNEF here.

Other oil-market news:
  • U.S. imports of gasoline from Europe were little changed near a 16-month low in latest weekly custom and ship-tracking data compiled by Bloomberg.
  • Russia will next month ship the smallest amount of Urals crude from its three main western ports in at least a decade, offering a glimpse of hope for those who think that rock-bottom prices can’t go much lower.
  • A fire at an oil pit affects crude production in PDVSA’s Morichal operational center in the Carabobo block of the Orinoco Belt, according to people familiar with situation.

©2020 Bloomberg L.P.

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