By Peter Nurse
Investing.com - Oil markets dropped sharply Monday, amid fears the output cuts expected in the U.S. and further afield won't be enough to match the collapse in demand caused by the coronavirus pandemic.
AT 8:40 AM ET (1240 GMT), U.S. crude futures traded 24% lower at $12.87 a barrel, while the international benchmark Brent contract fell 5.9% to $23.35.
U.S. crude inventories rose to 518.6 million barrels in the week to April 17, near an all-time record of 535 million barrels set in 2017, while floating crude oil storage has hit an all-time high of 160 million barrels. Storage capacity at the hub in Cushing, Oklahoma is likely to be maxed out within four weeks if stocks there keep rising at recent rates. Bloomberg reported that South Korea's commercial storage space is already fully leased, if not actually physically full.
This increase in the amount of crude stored is a solid indication that supply continues to outstrip demand. The widening of the spread between the two benchmark contracts illustrates how the problem is particularly acute in the U.S.. where the futures contract has to be settled physically, rather than in cash.
Oil futures marked their third straight week of losses last week - and have fallen for eight of the past nine - with Brent ending down 24% and WTI off around 7%, including the front-month May WTI contract settling sharply in negative territory ahead of the roll over into the June contract.
“Monday really focused people’s minds that production needs to slow down,” Ben Luckock, co-head of oil trading at commodity merchant at Trafigura said, in a report on Bloomberg. “It’s the smack in the face the market needed to realize this is serious.”
In another illustration of the pain in the sector, Diamond Offshore Drilling (NYSE:DO) filed for bankruptcy Monday, saying operating conditions had worsened "precipitously in recent months."
This week sees the start of the production cuts of 9.7 million barrels a day agreed by the members of the Organization of the Petroleum Exporting Countries and its allies led by Russia for May and June.
There have been signs that some countries have decided to start cutting output early given the state of the market.
OPEC’s fourth-largest producer, Kuwait, is one of those to cut, “sensing a responsibility responding to market conditions,” the country’s Oil Minister Khaled Al-Fadhel said Thursday.
And there have been reports over the weekend that Saudi Arabia, the world’s largest exporter of oil, would also start to reduce early.
However, “while bringing forward cuts by a handful of producers is helpful, it will have little impact on the oil balance in the short term,” said analysts at ING, in a research note.