Oil plunges again with supply cuts still not big enough

London — Oil prices plunged for a second day in a row on Tuesday on concerns about dwindling global capacity to store more crude and fears that demand may be slow to recover even after countries ease restrictions to combat the coronavirus pandemic.

Brent crude fell 83c, or 4.1%, to $19.16 a barrel at 8.08am GMT, following a 6.8% slide on Monday. US West Texas Intermediate (WTI) crude was down $2.57, or 20%, at $10.21 a barrel. The contract plunged 25% on Monday.

Analysts said part of the WTI decline was due to retail investment vehicles such as exchange-traded funds (ETFs) selling out of the front-month June contract and buying into months later to avert huge losses like last week, when WTI fell below zero.

The US Oil Fund (USO), the largest oil-focused US exchange-traded product, said it would further shift its holdings into later-dated contracts.

“The exodus, in our view, remains motivated by concerns over the saturation of storage capacity at Cushing and the associated risk of negative pricing,” Harry Tchilinguirian, global oil strategist at BNP Paribas, told the Reuters Global Oil Forum.

Though the world economy may start to recover as more countries allow businesses to restart, analysts say prospects for oil prices remains gloomy with so much crude in storage and supply cuts still not deep enough to counter plummeting demand.

“While we expect oil demand to modestly recover from the April lows as countries ease some lockdown measures, demand will remain under severe pressure in the near term because of the Covid-19 pandemic,” said UBS commodities analyst Giovanni Staunovo.

BP CEO Bernard Looney said his firm expected global oil demand to drop by about 15-million barrels per day (bpd) in the second quarter due to coronavirus-related movement restrictions.

That is more than the 10-million bpd of cuts agreed by oil cartel Opec, Russia and other allied producers (Opec+). The reductions are due to be implemented from May 1.

Russian energy minister Alexander Novak said on Tuesday that oil markets will start balancing out once an output deal took effect, but no significant rise in prices is likely in the near future due to high levels of global storage.

Global storage onshore was estimated to be about 85% full as of last week, according to data from consultancy Kpler.

In a sign of the energy industry’s desperation for places to store petroleum, oil traders are resorting to hiring expensive US vessels to store petrol or ship fuel overseas, shipping sources said.

Reuters

Source: businesslive.co.za