Oil prices under pressure after sub-zero plunge
Global oil markets remained under intense pressure on Tuesday, with Brent crude dropping below $20 per barrel for the first time in 18 years while other major benchmarks across the world tumbled.
Brent, the international marker, slipped as low as $18.10. The fall suggests markets see no immediate let-up to the collapse in oil demand that sent some US oil benchmarks plunging below $0 for the first time on Monday, leaving producers paying for buyers to take their oil away while available storage is scarce.
“The weakness we’re seeing in Brent today is more of a reflection of fundamentals — the fact that demand today is so weak,” said Christopher Haines, an analyst at Energy Aspects.
Coronavirus has sent the oil sector into a state of crisis, with lockdowns implemented by authorities to contain the outbreak slashing demand for crude by as much as a third.
Contracts for the US benchmark West Texas Intermediate for delivery next month tumbled as low as minus $40 a barrel on Monday — an unprecedented drop of more than $55. The slide was exacerbated by traders seeking to offload any obligations to take on physical product ahead of the contract’s expiry today as storage reached capacity at its delivery point in Cushing, Oklahoma.
Analysts at Goldman Sachs said retail investors, forced into last-minute sales as storage filled up, had been hit hardest by the slide in the May contract, which remained in negative territory on Tuesday at minus $4 a barrel, with the volume of trades on the day just a tenth of the volume of contracts for June delivery.
The June contract, which held above $20 a barrel on Monday, has also come under heavy selling pressure, dropping as much as 42 per cent on Tuesday to trade at lows of $11.79, suggesting the blowout in the May contract was more than just a blip.
While Monday’s slide reflected in part financial and storage issues, the fall in Brent — which can be stored on ships and more easily shipped to areas of higher demand — is “more reflective of the broader demand picture”, said Mr Haines.
Analysts said the June WTI contract — which has pared some of its losses to trade down 20 per cent at $16.34 a barrel — was likely to face further downward pressure in the coming weeks, given the supply glut shows little signs of abating. A record cut by Opec and its allies does not start to take effect until May and has so far failed to prop up prices.
Warren Patterson, head of commodities strategy at ING, said it was likely that “storage this time next month will be even more of an issue, given the surplus environment”.
“And so in the absence of a meaningful demand recovery, negative prices could return for June,” he added.
European equities traded lower, dragged down by losses in energy stocks. The continent-wide Stoxx 600 was down 2.4 per cent, with its oil and gas sub-index dropping 4.5 per cent. In London the FTSE shed 2.1 per cent, while Frankfurt’s Dax slid 3 per cent.
“Whilst we await the nature of the recovery, extreme oil price weakness — however it manifests itself — is not a flash in the pan and suggests equity risk in the oil & gas sector remains to the downside,” said Stuart Joyner, an analyst at Redburn.
Equities were also broadly lower in Asia, while futures tip US stocks to fall 1.8 per cent when trading in New York begins later.
On Wall Street overnight, the S&P 500 closed down 1.8 per cent, partly because of weakness in energy shares, but also due to increased pessimism over the time it will take for countries to emerge from lockdowns.
In fixed income, the yield on the 10-year US Treasury fell 0.08 percentage points to 0.549 per cent as investors retreated to the safety of core government debt.