Oil & Energy Markets

Oil Supply Glut Continues to Dislocate Markets, Negative Price Risk Persists

By Deepak Sharma
April 28, 2020
2 minutes read
Rusted Oil Barrel

The shock of negative WTI crude oil prices last week point to signs of a deeper dislocation in oil markets that is likely to persist for some months to come. Analysts and traders believe that the stabilization in prices after last week’s wild price fluctuations, which saw the price of the May contract for WTI plummet to minus US$37.63 per barrel, could be short lived, and that there remains a strong possibility that WTI prices could witness another steep drop in mid-May when the contract for June delivery approaches expiry.

WTI futures contracts, which trade on the NYMEX, need to be settled with physical delivery of crude oil before the expiry of the near-month contract, and reports continue to suggest a severe lack of oil storage capacity at Cushing, Oklahoma, the delivery point for WTI crude. The availability of storage at other delivery hubs across the U.S. is also likely to worsen over the next few weeks as Covid-19 containment measures across the country continue to weaken the demand for oil during a period that typically sees a steady ramp up in fuel demand leading into the summer driving season between June and August.

The oil supply glut is expected to grow over the next several months, as previously announced output cuts by the OPEC+ alliance don’t take effect till early May, while at the same time an estimated 50 million barrels of Middle Eastern crude is due to arrive in the U.S. over the next two months. However, given the historical and bitter experience of negative prices last week, the realization that prices could turn negative again could well serve to prop up the market by managing investor and trader expectations, whilst also pressuring regional oil producers to cut as much production as possible to avoid having to pay buyers to take their crude.

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