By Barani Krishnan
Investing.com - Fear of Covid-19 is striking the White House and a new wave of infections seem to be occuring as well in the countries that have reopened from lockdowns, posing concerns about demand for oil as economies try to get back on their feet.
June WTI, the benchmark for U.S. crude, settled down 60 cents, or 2.4%, at $24.14 per barrel. It hit a session peak of $25.59 earlier as market intelligence firm Genscape reported a 1.8-million-barrel decline in crude stockpiles at the Cushing, Okla. storage hub between May 1 and May 8, traders who saw the data told Investing.com.
London-traded Brent for July delivery, the global benchmark for oil, settled down $1.24, or 4%, at $29.63. It hit a session high of $31.45 earlier after Saudi Energy Minister Abdulaziz bin Salman announced plans to cut another million barrels daily from the kingdom’s output.
The White House is suffering a mini-outbreak of Covid-19 with Vice President Mike Pence’s Press Secretary Katie Miller testing positive, while Anthony Fauci and Robert Reid, two other senior health officials on the coronavirus task force, are on self-quarantine, according to reports. Pence and President Donald Trump have tested negative so far.
On the global front, both China and South Korea reported new spikes in coronavirus cases, with Seoul recording 34 new cases, its biggest single-day jump in about a month. In Germany, the closely-watched reproduction rate Covid-19 had climbed to 1.1, meaning 10 people with the virus could infect on average 11 others.
Both WTI and Brent are worth less than half where they began the year at.
But WTI has doubled since hitting a bottom of $12.34 on April 28 on optimism that stockpile builds will slow at the Cushing delivery point for U.S. crude as gasoline demand picks up from a reopening of most of America’s 50 states.
Indeed, the 1.8-million-barrels decline reported by Genscape on Monday suggested this.
“Gasoline production is going up and that’s not surprising, given that refiners are still having it good with the gasoline crack at around $15 per barrel,” John Kilduff, founding partner at New York energy hedge fund Again Capital, said, referring to the profit margin for turning crude into the motor fuel.
“The flipside, of course, is that now you might have higher gasoline builds instead of crude builds, because demand for driving hasn’t really picked up that much,” said Kilduff. “Also distillate demand is still faring rather badly as there’s barely a pick up in trucking and public transportation despite the U.S. state reopenings.”
Global storage of crude has, meanwhile, grown with little letup.
About 70 VLCCs, or Very Large Crude Carriers, have been stationary for at least four weeks in international waters, shipbroker Gibson reminded the market in a blog issued toward the end of last week.
That proves that the “contango play” in oil — where the discount in crude’s front-month versus the nearest contract makes the commodity worth for storing — could be revived, Gibson suggested. For now though, storage has become expensive, forcing those with oil in hand to try and turn those into products.
WTI’s front-month June contract was at a discount of less than $1.10 per to July WTI. July Brent was just about $1 less to its August contract.
The WTI contango was about 20 times larger less than three weeks back when U.S. crude fell to its first-ever negative pricing toward the expiry of its then May front month.
While another fate like that might not befall the current front month, the growing storage for U.S. crude is beginning to spook some in the market.
On the U.S. front, some 28 tankers with Saudi oil, including 14 VLCCs carrying a total of 43 million barrels, have started arriving on the U.S. Gulf and West coasts in stages.
Some longs in oil could be nervous enough to cash out this week, said Igor Windisch, author of the Geneva-based IBW Oil Brief.
“From here, profit-taking may be to consider,” Windisch wrote in his Monday note. “If you’re long, you’ll take some of the profits you’ve made. If you’re still the short entered on Friday, you’ll exit and take some of your profits. I wouldn’t enter a new position and will be ready to jump on a potential profit-taking sell-off.”