Storage constraints at the crucial Cushing storage facility in Oklahoma, US, were pivotal to the price crash of West Texas Intermediate (WTI) crude oil yesterday (20 April).

Traders scrambled to offload contracts for the May delivery of WTI, faced with the prospect of a peak in storage limitations – sending prices into a spectacular and historic nosedive.

The key US benchmark commodity entered negative pricing territory for the first time in history, ending the day at minus $37.63 after a flurry of selling sent the crude price spiralling from its opening value of around $18 per barrel.

Spot prices have rebounded today (21 April) as the June WTI contract comes into force, although remained in negative territory at midday GMT – hovering around minus $6.30.

The speed and severity of the fall sent shockwaves throughout global commodity markets, highlighting the precarious situation in which oil – facing unprecedented levels of low demand as a result of coronavirus – currently exists.


May delivery contract expiry was crucial to WTI oil price collapse

One of the key explainers for the price crash was that WTI was nearing the expiry of its futures contract for delivery in May – a month in which US storage capacity is expected to be pushed to its limits if action is not taken to slow production or boost refining activity.

As the May delivery deadline (21 April) for WTI approached, commodity traders made a frenzied final-hour attempt to offload their contracts.

The Cushing storage hub in Oklahoma is central to this picture – the key destination for WTI and where capacity is expected to be filled “within weeks”, according to Wood Mackenzie analyst Ann-Louise Hittle.

She said: “Adequate storage in Cushing is unavailable to those who need it. The problem is compounded because the contract is settled by physical delivery at Cushing. Brent is not constrained by this requirement for physical delivery.”


Crude oil production continues to outpace demand, despite efforts to curb output

The International Energy Agency (IEA) recently forecast that oil demand in May is expected to be 26 million barrels per day lower than the same month in 2019, as coronavirus lockdown measures continue to restrict industrial activity and travel – key drivers of crude demand.

Given this scenario, and the pressures it is placing on market infrastructure to put surplus supplies into storage, traders were reluctant to accept reserves for this May contract, exerting downwards pressure on the commodity price as they sought desperately to exit their positions.

“The large spread between the May and June contracts primarily indicates both the limits of storage and the increasing cost of keeping oil above ground,” said Adrian Lara, a senior oil and gas researcher at analysis firm GlobalData.

“Yesterday, this differential obviously went out of control when oil traders desperately tried to exit or rollover their positions, to avoid taking delivery of the May crude.”

Refining bottlenecks also contributed to the situation, as lockdowns limit the speed and capacity at which crude can be processed and moved on.

Lara added: “This historic price drop into negative territory signals that US oil supply is still excessive, and that production cuts are not occurring rapidly enough to avoid filling up storage.

“Fundamentally there is little doubt US storage won’t be enough by late May, early June if crude oil production remains at the current rate, and refining capacity does not increase.”

Recent figures show that US crude oil production is poised to decline this year amid the coronavirus outbreak, with the US Energy Information Administration (EIA) forecasting a 500,000 bpd year-on-year decline.

Despite these natural reductions, however, and a wider G20-backed global production cut agreement between members of the Opec+ alliance from next month, the immediacy of demand and storage pressures are continuing to exert significant pressure on global commodity prices.

Hittle said: “Oil supply has not yet been affected enough by either production shut-ins for economic reasons or by the Opec+ production cuts.”


June WTI crude oil contract may bring price stability, but uncertainty remains

With the June contract for WTI delivery due to kick in today, analysts are more hopeful that prices for the crude will stabilise now the rush to exit May options has ended – although coronavirus uncertainty continues to weigh heavily on the market.

Lara said: “The June contract was trading above $21 per barrel and this price should in principle have more weight on spot price as of today.

“However with no real certainty on when the US lockdown will end and how quickly the economy will start transporting people and goods, the downward pressure on WTI will continue during the next months.”

Wood Mackenzie’s Hittle added: “With signs of a possible easing in containment measures against Covid-19, the next month’s WTI expiry might not see such an intense selling pressure.”