Oil Slides After ETFs Move Into Later-Dated Contracts

By Mike Jeffers (Bloomberg) — Oil fell after the biggest oil ETF said it would sell out of its June WTI futures position as physical oil storage levels continue to balloon.

Futures in New York slid as much as 30%, snapping a four-day recovery as the United States Oil Fund LP said it will move all the money it invested in the front-month June WTI oil contract starting today, triggering a massive swing in the price relationship between the June and July contracts. At the same time, the global oil market is on track to test storage capacity limits in as little as three weeks, requiring the shut-in of nearly 20% of global production, according to Goldman Sachs Group Inc.

“Some of this downward pressure particularly in the June contract is an increasing lack of liquidity,” said John Kilduff, a partner at hedge fund Again Capital LLC. This is not coming only from the USO, but also due to brokerage firms, like Marex Spectron and TD Ameritrade, restricting client’s abilities to add new positions to certain crude contracts, according to Kilduff.

“It’s going to exacerbate the whole marrying of the June contract with the over supplied physical conditions and the lack of storage,” Kilduff said.

While U.S. drilling is sliding and Saudi Arabia has started reducing output ahead of the start date for OPEC+ supply cuts, an immense surplus of oil means storage tanks are close to capacity around the world. OPEC+ expressed frustration by the lack of oil cuts by other nations. Equatorial Guinean Oil Minister Gabriel Obiang Lima said on a conference call that producers such as the U.S., Mexico and Norway need to chip in with supply cuts.

In order to avoid Cushing storage from becoming over 90% full in May and June, total production shut-ins would have to equate to 1 million barrels a day in May, according to a JPMorgan Chase & Co. note. A further 500,000 barrels a day of shut-ins may be needed in June as well, the report said.

South Korea, which holds the fourth-biggest commercial storage capacity in Asia, was said to have run out of onshore space. Singapore’s coastline has become even more congested as the number of oil-laden tankers anchored offshore wait to be redirected to a willing buyer. Some vessels are being used to hoard fuel at sea as onshore tanks fill up. At least three tankers from Baltic and Black Sea ports with a combined 280,000 tons of Urals is heading to Malaysia, likely for storage, according to ship tracking data compiled by Bloomberg.

With a number of producers commencing output cuts, some of the huge discounts seen in physical markets have eased, particularly in Europe. Swaps markets in the North Sea and Russia were trading stronger last week, though there’s still plenty of cause for pessimism. On a global level, the swelling glut is set to test storage capacity limits in as little as three weeks, according to Goldman Sachs Group Inc., with traders, refiners and infrastructure providers seeking novel ways to hoard crude, including on tiny barges around Europe’s petroleum-trading hub, and in pipelines.

There were tentative signs at the weekend that the coronavirus outbreak might be loosening its grip, with death tolls slowing by the most in more than a month in Spain, Italy and France. Reported fatalities in the U.K. and New York were the lowest since the end of March.

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