Oil front months plummet on storage fears - Rystad comments

Approximately 400 million barrels of crude storage capacity remains globally, a good part of it in the US. With stocks building by an estimated 26.5 million barrels per day in April, we could see that storage capacity exhausted within a few weeks.

While the OPEC cuts will help, they are limited, and the global storage availability picture now looks grim for June, that’s why we are seeing WTI prices depressed further for June and July.

The market is also very volatile now because there is no concrete decision on regional shut-ins, predominantly in Texas. Shut-ins would affect June storage quite drastically and until we have some under way, prices are squeezed down.

The second month WTI contract comes due on June 20, very much after when we see onshore storage capacity filling. We believe that the market is catching up to this reality after yesterday’s price drop, and that’s why we see this dramatic drop in prices for June.

Brent has similarly been affected due to shortages of global storage capacity. Much of the empty global storage capacity resides in the US, and thus as that fills up, Brent will be affected as extra barrels outside of the US will need to find homes in a market quickly becoming saturated with oil.

There been discussion about tariffs on foreign oil in the US, which would depress the price for Brent. The larger issue though is that the OPEC cuts have been inadequate to balance the market since they do not begin until May 1, and in the meantime we will see storage fill globally.

Comparing the two, WTI is down more severely than Brent because of concerns of local storage in and near the Cushing hub, whereas storage for Brent faces less strong geographic constraints. So we have now a differential of around 8 USD which is not that large in today's context (narrows to $3 for later deliveries).  On that second question my guess is that people are slowly realizing the insignificance of the OPEC+ deal in the context of a massive demand destruction, and also, that Texas RR commission is likely to be unable to do much about proration soon enough.

Read the latest issue of the OGV Energy magazine HERE.