May WTI crude prices recover ahead of the contract expiry

James Dennis

21-Apr-2020

SINGAPORE (ICIS)–Front month May WTI crude futures rose sharply on Tuesday, turning positive again on the contract expiry day after closing yesterday at an unprecedented discount of minus $37.63/bbl.

However, oversupply and storage concerns continue to weigh on the market.

 Prices in $/bbl Month Low High Open Price at 05:18 GMT Change
Brent Jun 25.20 26.50 26.33 25.39 -0.18
WTI May -16.74 2.54 -14.00 1.38 +39.01

May WTI futures prices plummeted on Monday as traders attempted to close out long positions prior to the contract expiry and thus avoid taking physical delivery of crude.

However, with the number of buyers limited prices were forced deep into negative territory.

When a WTI crude futures contract expires, traders can either roll their position to the next month or take physical delivery of the crude.

It is to be noted that the June contract registered much smaller losses on Monday, and is presently trading at $21.34/bbl up $0.91/bbl.

This price difference between May and June WTI contracts reflects the broader steep contango forward market structure for crude in which nearer months are priced significantly lower than delivery months further into the future.

The structure further indicates the well supplied market and limited prompt demand.

In theory this contango forward structure makes storage economically viable but only if capacity is available and costs are not prohibitive.

The May WTI price crash highlighted the impending storage crisis in the US, particularly at the key storage hub at Cushing, Oklahoma, the physical delivery point for WTI crude futures.

These storage concerns have overshadowed efforts by OPEC+ and other producers to re-stabilise the market.

US crude production remained in excess of 12m bbl/day in the week to the 10 April, according to Energy Information Administration (EIA) data.

This comes while refining operations in the US have been scaled back massively, falling by around 5m bbl/day since the start of the year.

The widening gap between production and refinery inputs is forcing more oil into storage, and the markets fear that this could soon become full.

US inventory data in the latest EIA weekly report also revealed that domestic crude stocks had risen by 19.2m bbl to 503.6m bbls.

Meanwhile stocks at the Cushing, Oklahoma oil hub rose 5.8m bbls to 55m bbls.

Cushing has a total storage capacity of just over 91m bbls.

However, EIA reported in September last year that working capacity was around 76m bbls.

Additional reporting by Richard Price and Ignacio Sotolongo

Focus article by James Dennis

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