US Oil Falls Below $13 a Barrel as Global Storage Evaporates, United States Oil Fund Plans Crude Contract Dump

With global storage capacity hitting historic limits, and crude speculators shaken from last week's negative close, futures prices are extending declines in early Monday trading.

Global oil prices extended declines Monday, pulling U.S. crude back below $13 a barrel, as investors continue to fret over the lack of domestic storage for surplus crude amid the ongoing collapse in world demand.

Prices were also pressured by a move from the United States Oil Fund  (USO) - Get Report, the world's biggest oil ETF, to sell its entire portfolio of WTI futures contracts for June delivery over the next four days. 

"Currently, in the context of the COVID-19 pandemic and disputes among oil producing countries regarding potential limits on the production of crude oil, significant market volatility occurred in the oil futures markets," the ETF said in a Securities and Exchange Commission filing. "In addition, the exchange where the Benchmark Oil Futures contract is traded became concerned about positions that USO had acquired in that contract and imposed limits on USO’s holding of that contract, as well as subsequent months of that contract."

Front-month WTI futures contracts -- the new benchmark for U.S. prices that would have owners taking delivery of crude in June -- were last seen $4.34 lower from their Friday close in New York and changing hands at $12.60 per barrel in early Monday trading.

Brent futures for June delivery, which benchmark around 60% of global crude purchases, were marked $1.81 lower at $19.63 per barrel after briefly trading as low as $15.98 last week, the weakest since 1999.

The U.S. Energy Department said last week that domestic crude inventories rose to just under 520 million barrels, a 15 million barrel increase and just 15 million from the all-time peak of July 2017. Storage capacity, meanwhile, is nearing its historic limit, with inventory levels in the main U.S. delivery hub of Cushing, Oklahoma, essentially hitting their 77 million barrel capacity. 

The lack of space for un-needed crude has primed investors for a repeat of last week's historic oil market moves, which saw front-month futures contracts trade in negative territory as speculators paid to sell their crude rather than take physical delivery. And with the airline industry shuttered amid travel restrictions and lockdowns, and factory activity slumping the most on record this month, there is little to suggest that buyers will find profitable destinations for crude in the coming weeks.

"Speculators are looking for lockdowns across to the world to be eased soon and a view that low prices will trigger voluntary -- and more likely involuntary -- shut-ins via bankruptcies across the US shale oil patch," said Ole Hansen, head of commodity strategy at Saxo Bank. "That belief however was not shared by the stock market as the market cap in 16 independent oil and gas producers jumped by 7% last week".

"Something has to give and that will be the key battle over the coming weeks," he added.

Last Friday, oil services group Baker Hughes said U.S. drillers pulled 246 rigs from operation in April, the biggest decline since January 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.