Incessant pressure to find storage for the masses of unused crude oil saw oil prices take another pummeling Tuesday almost as bad as the one that lashed it Monday.
On Tuesday, oil prices plummeted almost 20% during early morning deals, extending Monday's nearly 25% drop amid increasing and widespread fears about dwindling global storage capacity. West Texas Intermediate (WTI), the U.S. benchmark, nosedived 19%, or $2.50, to trade at $10.22 per barrel before lunch on Tuesday. Brent crude, the international benchmark followed suit, trading 4.5% lower at $19.09 per barrel.
WTI and Brent are both on track for their fourth straight month of losses for the first time since 2017. Despite the plunge in world crude prices, U.S. firms maintained their oil production at a record level in the first quarter of 2020, "filling up almost all available storage capacity," and making matters worse.
"The June contract is falling due to the reality of demand levels being well below current production levels and limited storage options," said Reid Morrison, PwC oil and gas advisory leader, to CNBC. "Choppiness in the markets will be significant as economies deal with lockdowns and returning to normal."
Oil got off on the wrong foot Monday with U.S. oil prices plummeting nearly 25%, also on fears worldwide storage will soon fill due to the unheard-of demand destruction caused by COVID-19.
Prices Monday took a hit after the United States Oil Fund (USO), which is popular with retail investors, said it will sell all its contracts for June delivery beginning Monday in favor of longer-term contracts.
"The move (by USO) is a recognition of the bleak prospects for the US oil sector in May and June," noted Cailin Birch, the global economist at The Economist Intelligence Unit.
WTI for June delivery fell 24.56% (or $4.16) to find its footing at $12.78 per barrel. It earlier traded as low as $11.88. Brent crude lost 6.76% to settle at $19.99. Analysts said each contract is coming off its eighth week of losses over the past nine weeks.
On the other hand, WTI for July delivery toppled more than 14% to $18.18. The August contract slipped more than 9% to $21.50. This indicated traders see no significant recovery in prices in the next few months.
"The market knows that the storage problem remains and we are on a calculated path to reach tank tops in weeks," said Bjornar Tonhaugen, head of oil markets at Rystad Energy. "Actions are needed now as the problem stopped being theoretical and far away. The storage clock is ticking for producers and we are approaching the final countdown if no further action is taken."
