Oil rebounds from this week’s unprecedented wipeout with May futures contract prices edging just above zero

Oil rebounded in Asian trading, after plunging below zero for the first time in history amid rapidly filling American storage tanks, as the US benchmark’s May contract entered its final trading session.

Futures in New York traded at around US$2 a barrel after sinking to as low as minus US$40.32 during Monday’s jaw-dropping collapse. The June contract, however, which had trading volumes more than 40 times higher, rose toward US$22. The spread between the two reflects the growing fear that those who take physical delivery of crude in the near future may not find any outlet or storage for those barrels as refineries curb operations.

With the coronavirus pandemic bringing the US and much of the global economy to a standstill, processors are using far less crude, leaving so much unused oil sloshing around that American energy companies are running out of room to store it. And if there’s no place to put the oil, nobody wants a crude contract that is about to come due.

“An unprecedented collapse to minus US$40 oil at the US benchmark had a lot to do with the expiry of the May contract,” said Jason Bordoff, director of the Centre on Global Energy Policy at Columbia University and a former White House energy adviser. But it also “reveals significant underlying structural problems as storage capacity fills up that will hang over US prices until supply shuts in and OPEC+ cuts begin to bite,” he said.

The extreme moves in West Texas Intermediate crude show just how oversupplied the US oil market has become. Global benchmark Brent, by contrast, is trading above US$26 a barrel as demand in China recovers. The WTI June contract is likely to see downward pressure in coming weeks and there will be a “violent rebalancing” in American production as storage fills up, Goldman Sachs said in a note.

Oil prices have plunged as coronavirus infections surge, prompting lockdowns and travel bans that have led to a collapse in consumption. The breakdown of the OPEC+ alliance in early March compounded the situation, while the subsequent output-cut agreement proved too little and too late in the face of a one-third collapse in global demand.