US oil slides back into negative territory as turmoil continues

The price of oil for May delivery slid back into negative territory on Tuesday, as modest improvements overnight receded and June contracts started to come under pressure.

The price of West Texas Intermediate crude for May delivery made history on Monday, when it slumped by over $55 to close at -$37.63 a barrel, the first time it has traded in negative territory after an equally historic rout.

To take note of however, traders pointed out that exceedingly low trading volumes were part of the reason behind the move ahead of the expiry of the May futures contract on Tuesday evening.

Overnight, the price recovered during Asian trading hours to reach $2.54. But by the time trading got underway in Europe on Tuesday, it was once again in negative territory, at -$4.29.

The Covid-19 pandemic and subsequent lockdown has seen demand for oil plummet, and there is now a huge surplus requiring storage. America’s main storage facility in Cushing, Oklahoma, is expected to be full within a few weeks, and traders have desperately looked to offload contracts rather than receive delivery of oil with nowhere to store it.

A price war between Opec and Russia had further added to the supply glut, and while the oil cartel and its occasional ally have now agreed to cut production by 9.7m barrels per day, the curbs were not due to come into effect before May.

By mid-morning, the WTI June contract was also coming under pressure, while similarly-dated Brent crude – which is in part stored in tankers offshore – had slumped 24% to $19.33, the first time it had fallen under $20 since the start of the century.

Chris Beauchamp, chief market analyst at IG, said: “Oil’s rout continues to command all the attention in global markets, as investors move on from the Covid-19 crisis to the complete breakdown in normality in one of the world economy’s most vital components.

“While the May contract is now banished the history books, it looks like the June contract is going the same way, falling below $20 and then taking out $19 and $18 in short order for WTI, while Brent crude has met the same fate. We are witnessing markets finally play catch up to the reality on the ground in the oil market – huge oversupply and non-existent demand have combined with near-full storage facilities to drive complete dislocation in the crude oil markets.”

Russ Mould, investment director at AJ Bell, said: “Another day and the oil market is breaking new ground and not in a good way. We are in genuinely unprecedented territory.

“Like the majority of commodities, oil is traded in futures contracts. The purchase or sale of a barrel of oil is agreed at a fixed price for delivery on a specified date. With the May futures contract expiring today, no takers for physical delivery, a growing supply glut putting pressure on key infrastructure and traders looking to sell or roll over contracts to next month, there was a perfect storm which drove the extreme price action.

“Unless the global economy is in a better place by mid-May, we could be looking at a very similar situation in a month’s time for WTI price action.”

On a hopeful note, analysts at Citi told clients: "The global economic recession brought about by the COVID-19 pandemic will likely slow the pace of oil’s eventual recovery but we believe the actions taken by OPEC+ and by the G20 should accelerate the oil market’s recovery before the current global economic slowdown ends."