U.S. Crude in Wild Swings as Bulls Try to Keep Prices Above $10

(C) Reuters.

By Barani Krishnan

Investing.com – U.S. crude ended slightly in the negative on Tuesday, mounting a comeback from a 21% plunge earlier in the day as bulls faced off with bears to keep a barrel of oil at above $10.

But U.S. West Texas Intermediate’s eventual foray into negative pricing seems inevitable anyway, as more investors flee the spot month to contracts further down the calendar. Physical storage for oil — the alpha and omega in the market now — remains critically short in the meanwhile.

“We can keep this market at above $10 now but there’s no possible way to keep it from going to subzero, not with the way people are fleeing from the front-month and clamoring about storage,” said John Kilduff, founding partner at New York energy hedge fund Again Capital.

June WTI settled at $12.34 per barrel, down 44 cents, down 3.4%. WTI plunged to as low as $10.09 in Tuesday’s Asian trading, losing 21% after Monday’s 25% slump, before rebounding.

Brent, the London-traded global benchmark for crude, slid 33 cents, or 1.4%, to $22.74.

June WTI’s collapse in the previous session was triggered by the United States Oil (NYSE:USO) ETF’s unexpected move to sell all its holdings in the most active U.S. crude futures contract to spread its risk further down the calendar to June 2021.

S&P also announced its largest commodity index will roll from the June oil contract into July.

The Chicago Mercantile Exchange, meanwhile, raised its margin requirements for all forward oil contracts. That could force more investors to bail out of crude to raise cash, a vicious cycle that could send prices even lower.

Notwithstanding the actions of the USO Fund or the margin requirements set by the CME, physical U.S. crude itself is trading at a discount of $2 per barrel or more to June WTI — which has to converge with the physical market before its expiry in another three weeks.

June WTI was also at a contango, or discount, of nearly $6 to July WTI, demonstrating the spot contract’s vulnerability to further collapse.

U.S. crude oil fell into negative pricing last week for the first time in its 37-year history as no buyers turned up to take delivery of its expiring May contract, which fell to as low as minus $40. Demand for oil as a whole has fallen some 20 million to 30 million barrels per day because of the Covid-19 pandemic versus production cuts of less than half those amounts. In the United States, storage for oil is fast depleting, with most facilities at near capacity while supplies continue building.