Oil prices plunged to a more than 21-year low on Monday as uncertainty mounted around storage of excess supply. WTI crude oil plunged as much as 39% to $11.20 a barrel, while Brent slid 6.6% to $26.23 a barrel at intrasession lows. The coronavirus pandemic has torpedoed demand for the commodity, with fuel use in cars and planes slumping. The commodity fallen over the past week even after OPEC and its allies agreed to a historic production cut intended to backstop prices. The WTI market has entered contango, meaning spot prices are now lower than prices for future delivery of crude oil, a highly unusual occurrence.
Oil plunged to a more than 21-year low on Sunday. The commodity’s latest round of sharp selling comes as uncertainty mounts around storage for excess oil. Demand for crude has plummeted since the coronavirus outbreak has frozen activity worldwide.
West Texas Intermediate crude oil plunged as much as 39% to $11.20 a barrel, its lowest price since December 1998 and biggest intraday drop since at least 1982. Brent crude losses were muted by comparison, with the commodity sliding 6.6% to $26.23 a barrel at intrasession lows.
The price of oil has continued to slide even after OPEC and its allies agreed to the biggest-ever production cut — one intended to backstop prices. Investors remain unconvinced the cuts can offset cratering demand for the commodity as the novel coronavirus keeps society from operating normally.
Concerns around storage come as near-term WTI crude prices trade at large discounts to longer-dated contracts. That dynamic is playing out amid worry that a key storage hub in Cushing, Oklahoma, is nearing capacity, according to Bloomberg.
“Basically, bears are out for blood,” said Naeem Aslam, the chief market analyst at AvaTrade. “The steep fall in the price is because of the lack of sufficient demand and lack of storage place given the fact that the production cut has failed to address the supply glut.”
Aslam said WTI could crash even further to $10 a barrel with US rig counts — the number of active oil-producing facilities — falling to their lowest levels since 2016.
“The bottom line is that there is no doubt that oil prices are way oversold at the current level, but given the circumstances, it is likely that the price may continue to fall further because the rig count hasn’t touched its bottom yet,” he said.
Oil prices and rig counts are strongly correlated. Higher oil prices make production more profitable, encouraging more producers to operate.
The closely watched Baker Hughes oil-rig report showed that as of Friday oil-rig counts in the US were 544, 35% down from the same time in March.
Oil is now in contango
The movements prompted WTI oil prices to enter contango, meaning that oil contracts for future delivery are more expensive than spot prices.
“The contango on WTI from now spot to the June contract can be described as a mega-contango,” Jeffrey Halley, a senior market analyst of Asia Pacific at Oanda, said. “As of Friday, spot was $18 a barrel with the June contracts around $25 a barrel.”
“The extreme contango tells us nobody in America wants the oil in the short-term,” Halley added.
Aslam added: “For an investor who holds a long term perspective, a time frame of 12 months to 24 months, the current plunge in oil price represents an opportunity.”