Oil Extends Drop Below $11 as ETF Selloff Exacerbates Volatility

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By Sharon Cho and James Thornhill – Bloomberg.com

Crude extended its slide below $11 a barrel after the biggest oil exchange-traded fund unexpectedly began selling all its holdings of the most active contract amid rapidly dwindling storage capacity.

Futures fell more than 15% in New York after losing a quarter of their value on Monday. The United States Oil Fund LP sold all of its West Texas Intermediate June contracts, significantly widening the spread between July WTI and raising concerns of a repeat of the collapse that sent oil below zero for the first time ever last week. U.S. producers have started making crude deliveries to the nation’s emergency stockpile as storage space runs out.

Oil has lost almost 80% this year as the coronavirus outbreak vaporized demand for everything from gasoline to crude despite global efforts to stem the spread. The world’s biggest producers have pledged to slash daily output from the start of next month to try and balance the market, but the collapse in consumption has led to a swelling glut that’s testing storage limits worldwide.

South Korea, which holds the fourth-biggest commercial storage capacity in Asia, was said to have run out of onshore space, while Singapore’s coastline has become even more congested with oil-laden tankers. In order to avoid the U.S. hub of Cushing from becoming more than 90% full in May and June, total production shut-ins would have to equate to 1 million barrels a day this month, according to JPMorgan Chase & Co.

“The startling June sell-off is in part due to the reality of storage facilities filling up rapidly,” said Stephen Innes, chief global market strategist at AxiCorp Ltd. Strategic buying by the U.S. to fill its emergency reserves won’t provide a huge boost for prices, but it will support sentiment and the physical market, he said.

West Texas Intermediate for June delivery dropped $1.98 to $10.80 a barrel on the New York Mercantile Exchange as of 9:42 a.m. Singapore time. The contract fell $4.16 on Monday to close at $12.78. Brent for June settlement slipped 78 cents to $19.21 after declining 6.8% on Monday.

The U.S. Oil Fund is moving its money to contracts spread between July 2020 and June 2021 due to new limits imposed upon it by regulators and its broker, according to a filing. The ETF has changed its investment policy five times in the last two weeks.

Russia offered a glimmer of hope that a more balanced market isn’t far away. The world’s largest energy producer will next month ship the smallest amount of Urals crude from its three main western ports in at least a decade. Meanwhile, Saudi Arabia is said to have made an early start on drastic output cuts that weren’t meant to kick in until May 1.

 

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