Under pressure: US oil prices turn negative, May deliveries seen as worthless

US oil prices turned negative overnight, as oil due to be delivered in May was considered to be worthless.

May futures contracts for West Texas Intermediate (WTI), the US benchmark price, hit -$US37.63 ($59.35) overnight.

Oil to be delivered in June however, was priced around $US21, which many see as a more reliable view of traders’ outlook for oil.

Some of the ASX’s US-focused oil companies will be able to survive lower for longer oil, such as Winchester Energy (ASX:WEL) which put a $15.60 price on its Permian wells in 2017, provided the company is not carrying too much debt.

Pray tomorrow gets me higher

The May contracts expire today and without enough storage in the US hub Cushing for those who need it, selling intensified in the May futures contract, said Ann-Louise Hittle, vice president for macro oils at Wood Mackenzie.

“This issue is most intense for May WTI because oil demand is at its weakest, with full coronavirus containment measures in place across much of the US,” she said today.

“For May WTI, the problem is compounded because the contract is settled by physical delivery at Cushing. Storage at the Oklahoma facility is expected to be full within weeks. Brent [the North Sea benchmark price] is not constrained by this requirement for physical delivery.

“On top of this, oil supply has not yet been affected enough by either production shut-ins for economic reasons or by the OPEC+ production cuts.

“With signs of a possible easing in containment measures against COVID-19, the next month’s WTI expiry might not see such an intense selling pressure.”

Pressure that burns a building down

But oil markets have been under pressure for months, with prices beginning to fall in January when traders began to realise how big an impact the COVID-19 pandemic would have on the world’s largest oil buyer, China.

The US has been hit particularly hard with oil production peaking around 13 million barrels a day throughout the March quarter.

Refiners have been cutting their runs as storage for refined fuels have also been filled to capacity and demand around the world remains low, as whole countries have stopped their economies to fend off a spread of the COVID-19 disease.

“As refiners have been rejecting physical barrels, physical storage has been piling up. To be clear, this is a North American storage congestion story, not a global one where we estimate some 1.5 billion barrels remaining in onshore storage capacity,” RBC Capital Markets’ commodity strategist Michael Tran said.

Tran says oil producers and refiners in the midwest are in trouble as they rely on physical storage on land.

Gulf Coast crudes have more options as they can be sold into Strategic Reserves or into expensive floating storage in the Gulf, which Tran says might buy them a reprieve.