Any lifting of isolation measures in response to the COVID-19 pandemic could be too late to save oil from a return to negative prices in the weeks ahead, as a wipe-out of demand and tapped out storage conspire to drag Brent crude to a 21-year low.

A meaningful recovery in demand is still three months away on some estimates. ASX energy stocks were hit with renewed selling led by Cooper Energy sliding 5.8 per cent to 41¢, Beach Energy declining 3.9 per cent to $1.24 and Oil Search 3.6 per cent to $2.41. Large caps Woodside Petroleum and Origin Energy fell just 1.5 per cent.

The rout is particularly bad for the Kingdom, which requires a crude price of $US80 a barrel in order to balance its budget according to the International Monetary Fund. The spillage has extended to ASX-listed energy stocks which have been trading near their lowest levels since 2004.

“You’re really entering Arab Spring type waters because these Middle Eastern countries are all upside down,” said Tribeca Investment Partners portfolio manager Ben Cleary.Advertisement

The one thing that could save the oil market at this point, the pick-up in demand from an end to isolation and social distancing orders, is likely to come way too late to be of any help.

While China’s traffic volumes are nearing normal, if its timeline were extrapolated to the rest of the world, that only means demand would pick up meaningfully by mid-July.

“I think two things. Restrictions tend to be held in place for longer and secondly, the risk of a re-emergence of infection is very real,” said NAB head of commodity research Lachlan Shaw. “So it’s not clear to me where we get a clear run of demand recovery.”

There have been no signs of improvement to the market fundamentals that caused West Texas Intermediate’s May contract to fall as low as minus $US40.32 on Monday. A lack of US storage and refining capacity meant many traders were unwilling to deal with the risk of taking physical delivery of the contract, driving the more than 300 per cent drop in the WTI May contract price.

The June contract for WTI crude fell heavily as well, closing Tuesday’s session 35.8 per cent lower at $US13.12 a barrel and falling as low as $US6.50 in later trading. LNG spot prices were also weaker on Tuesday, tumbling 7.9 per cent to $US2.11 per million British thermal units.

Other US oil prices were also hit hard earlier in the week. Kansas Northwest sweet dropped 896 per cent to minus $US49.75 on Monday while Louisiana sweet fell 34 per cent to $US13.37.

Concerns over storage and oversupply are plaguing the market as the price falls below the economic cost of production for some energy producers.

“I think the OPEC-plus cuts disappointed because there were initial talks it could be 20 million barrels. Demand destruction is 30 to 35 million barrels a day,” said Mr Cleary.

“With only 750 million barrels of oil storage available, there’s 30 days until there’s nowhere left to store the excess.”

That means global storage is currently due to go to zero around the same time the next Brent and WTI contracts are due to expire.

Storage tanks in WTI hub Cushing, Oklahoma, were only four weeks off tank tops, when storage is at full capacity, on April 10, according to Morgan Stanley.

With global oil storage near zero, there will be very few investors willing to hold the shortest-dated contracts when they expire, meaning traders could be willing to get rid of them whatever the costs.

“Can the WTI June contract trade negative? I think it can,” said NAB’s Mr Shaw. “Cushing inventories are likely to get to tank tops in the next few weeks so I think that’s very possible.

“It really signals that the oil market is in complete turmoil. We’ve never been in the position it finds itself in today. We are working day by day through history.”

While OPEC-plus and its allies have agreed to reduce supply by 10 to 12 million barrels a day, the market is still being oversupplied by at least 20 million barrels a day.

“In the absence of those demand-side factors, you’re going to have to see massive supply shut-ins,” said Mr Cleary.

“The problem is the US companies are very well hedged this year so won’t stop producing this year. So it’s back to OPEC and who cuts with OPEC?”

So far the extremes of the delivery problem has been limited to WTI contracts but the ever decreasing storage across the globe means Brent could suffer a similar fate.

“Brent has more flexibility but again, when you look across the landscape, European storages are spoken for, floating storage is filling rapidly, we’ve got 20 million barrels off the Californian coast and 30 million in the North Sea,” said Mr Shaw.

“The numbers in floating storage is eye-watering and eventually that will hit operational limits. I think it can react the same way [as WTI].”

While China and the US have promised to buy up more oil to reduce the glut, their strategic petroleum reserves are also near tank tops.

Exacerbating the problems on the market are large oil ETFs such as the $US2.9 billion ($4.6 billion) United States Oil Fund which is forced to sell near-dated contracts to avoid taking delivery of the the barrels.

While not directly responsible for the heavily selling seen this week, traders say its volumes in previous weeks helped set the table for Monday’s chaos and that it creates large price swings.

The only cure for another potential bust in oil prices in the next month appears to be the return of demand.

But even when demand does return to normal levels, markets could be faced with another problem.

“The thing that’s going to happen after all this is the oil price is going to go through the roof because there will be no one bringing new production online,” said Mr Cleary.

Extracted from AFR