Crude oil futures are facing another historic day on Tuesday as the energy commodity faces steep losses. One day after a futures contract cratered to negative territory, the latest futures contract is plunging double digits – and there may be no reprieve in sight. How long will this blood bath last?
May West Texas Intermediate (WTI) crude futures rebounded 114% to $5.32. However, June West Texas Intermediate (WTI) crude futures plummeted $8.35, or 40.92%, to $12.08 per barrel at 17:11 GMT on Tuesday on the New York Mercantile Exchange. Year-to-date, US oil prices are down 80%.
Brent, the international benchmark for oil prices, is also deep in the red on Tuesday. June Brent crude futures tumbled $6.12, or 23.93%, to $19.45 a barrel on London’s ICE Futures exchange. Brent prices are down 70% so far in 2020.
The main problem for oil is oversupply. There is a global supply glut that has been caused by a collapse in international demand. With the coronavirus pandemic shutting down major economies, demand is hemorrhaging approximately nine million barrels per day (bpd) – and this could last until the summer. Major oil producers – the US, the Organization of the Petroleum Exporting Countries (OPEC), and OPEC+ allies – have slashed output levels, but it may not be enough or in time for delivery.
As the world is awash in oil, storage levels are reaching full capacity. Floating storage levels – oil that is stored at sea without a booked destination – is nearing maximum capacity. Global land storage levels are exceeding 70%. Tankers are topping up, and experts warn that there might be about 100 million barrels of storage left in the US. Some companies are going as far as renting from the government for federal land space, while others are paying businesses to dispose of their crude.
The other main headline on Tuesday is the US Oil Fund, also known as USO, which crashed 32% below $3 a share and witnessed trading halted at the opening bell. USCF, the exchange-traded fund (ETF) that sponsors USO, announced that it would create extra shares because of the oversupply and a paucity of crude storage. On hopes of prices stabilizing, retail investors are pouring into USO – the latest figure highlighted $1.5 billion in inflows in a single week.
But experts are sounding the alarm that it may not be able to meet its investment objective. Earlier this month, USO diversified its exposure to oil prices by delving into different contracts spanning multiple months: 80% in the front month and 20% in the second month. According to the issuer’s Securities and Exchange Commission (SEC) filing:
As a result of these changes, USO may not be able to meet its investment objective, which is for the daily percentage changes in the NAV per share to reflect the daily percentage changes of the spot price of light, sweet crude oil, as measured by the daily percentage changes in the price of Benchmark Oil Futures Contract.
In other energy commodities, June natural gas futures tumbled $0.081, or 4.21%, to $1.843 per million British thermal units (btu). June gasoline futures shed $0.1313, or 19.65%, to $0.537 a gallon. June heating oil futures declined $0.1385, or 15.6%, to $0.7493 per gallon.