Global oil prices extended declines Tuesday, pulling benchmark crude to fresh 18-year lows, following the first negative close for a U.S. futures contract on record and the ongoing collapse in world energy markets.
Brent crude futures contracts for June delivery, the benchmark reference for around 60% of global crude purchases, tumbled below $19 for the first time since 2002 in overnight trading, a 27.3% collapse from last night's close after President Donald Trump said he would 'look in to' banning imports from Saudi Arabia into the United States.
WTI crude futures for June delivery tumbled 29.5% to $14.45 per barrel as investors who sold out of yesterday's expiring May contract added pressure to the new U.S. benchmark.
With U.S. crude inventories rising each week as global demand evaporates amid the coronavirus pandemic, domestics storage facilities, already under pressure from record production, are nearing full capacity. That's left speculators with the grim choice of taking physical delivery of oil -- but having nowhere to store it -- or paying for the right to sell their oil futures contracts.
That dynamic lead to the first negative close for U.S. oil prices, at -$37.63 last night, on record and looks set to continue at least for the coming weeks as large parts of the global economy remain shuttered and travel restrictions ground aircraft around the world.
"Given the extreme demand destruction we are seeing in the market at the moment, storage is filling up quickly," said ING's head of commodity strategy Warren Patterson. "Any longs left in the physically deliverable WTI May contract will need to have storage booked, and clearly there were some who did not, and who were willing to pay any price to exit their long positions."
"A key question is whether we could see a repeat of this with the June expiry next month," he added. "It is likely that storage this time next month will be even more of an issue, given the surplus environment, and so in the absence of a meaningful demand recovery, negative prices could return for June."
The Energy Sector SPDR ETF (XLE) , meanwhile, was seen 3.6% lower at $31.70, a move that would peg its year-to-date collapse to around 47.5%.
Last Friday, oil services group Baker Hughes said U.S. drillers pulled 66 rigs from operation, the biggest decline since February 2015 and capping a one-month period during which some 35% of capacity has been taken offline amid signals of a cliff-edge decline in global demand.
The International Energy Agency, in fact, has forecast the steepest decline in global demand on record as the coronavirus pandemic shutters the world economy.
That followed last week's agreement among OPEC member states, as well as non-member allies such as Russia, to cut their collective production by 9.7 million barrels per day, with the U.S., Canada and Brazil contributing 3.7 million barrels per day.
Market reaction to the cuts, which go into effect on May 1, has been dictated by the fact that the reference point for the reductions will be April, a month during which Saudi Arabia had pledged to pump around 12.3 million barrels of crude was it ramped-up its price war with Russia.
That effectively means the first phase of the cuts -- from May until June -- will amount to around 7 million barrels per day for OPEC+ and slide to 5 million barrels per day over the second half of the year.
"The measures announced by OPEC+ and the G20 countries won’t rebalance the market immediately," the IEA said last week. "But by lowering the peak of the supply overhang and flattening the curve of the build-up in stocks, they help a complex system absorb the worst of this crisis, whose consequences for the oil market remain very uncertain in the short term."
"There is no feasible agreement that could cut supply by enough to offset such near-term demand losses," the agency added. "However, the past week’s achievements are a solid start and have the potential to start to reverse the build-up in stocks as we move into the second half of the year."