Oil prices under pressure as futures deadline looms

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
Plummeting demand for oil due to worldwide COVID-19 lockdowns have caused a supply glut. (Sue Ogrocki/AP Photo)

Oil prices were under pressure on Monday morning, as fears continue about oversupply in the market.

Crude futures (CL=F) were down 6.3% to $18.52 a barrel, while international Brent futures (BZ=F) were 1.8% lower at $25.96.

Crude futures are the standard measure of US oil prices and analysts said they sold off more sharply than the international benchmark due to concerns about storage capacity in the US.

“Investors are concerned about the storage issues despite the fact that we have seen some serious voluntary production cut by the US Shale oil producers over the last week,” said Naeem Aslam, chief market analyst at Avatrade, said. “An intense sell-off of West Texas Crude remains a possibility.”

Fears around storage are rising as the deadline for June futures contracts looms. June futures contracts expire on 19 May, at which point anyone holding them will have to take delivery of barrels of oil.

Traders are jittery about the expiration date after oil prices turned negative for the first time in history last month around the May futures expiry date. It meant traders were in effect paying people to take barrels of oil off their hands.

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The unusual phenomenon was caused by plummeting demand for oil. Worldwide lockdowns in response to COVID-19 mean people are using far less fuel than normal.

As a result, investors are having to pay to put barrels in storage. The supply glut is also putting pressure on storage capacity.

Kang Wu, an analyst at commodity specialist S&P Global Platts, said late last month that global oil storage capacity will likely be filled by the end of May.

“What we’re looking at — just as with coronavirus and the need to flatten the curve of spread to manage hospital beds and ventilators — in oil we’re looking for a flattening of the curve to manage the availability of storage,” Wu said. “We need to slow down the rate to tank tops.”