U.S. oil off lows after falling over 20% to levels unseen since 1999

SINGAPORE (Reuters) – Crude oil futures fell on Monday, with U.S. futures dropping more than 10% to levels unseen since 1999 amid concerns that U.S. storage facilities will soon be brimful with demand evaporating due to the coronavirus pandemic.

The volume of oil held in U.S. storage, especially at Cushing, Oklahoma, the delivery point for the U.S. West Texas Intermediate (WTI) contract, is rising as refiners throttle back activity due to slumping demand.

“It hasn’t reach capacity but the fear is that it will,” said Michael McCarthy, chief market strategist at CMC Markets in Sydney, adding that once the maximum capacity is reached, producers will have to cut output.

Floating storage in tankers is also estimated at a record 160 million barrels.

The front-month May WTI contract CLc1 was down $3.40, or 18.6%, to $14.87 a barrel by 0600 GMT. At one point, the contract had fallen as much as 21% to hit a low of $14.47 a barrel, the lowest since March 1999.

That contract is expiring on Tuesday, and the June contract CLc2, which is becoming more actively traded, fell $1.51, or 6.0%, to $23.52 a barrel. Brent LCOc1 was also weaker, down 90 cents, or 3.2%, to $27.18 a barrel.

Investors bought June WTI contracts and sold their May futures ahead of expiry and this widened the contango spread between the two front months to a record $8.70 a barrel. CLc1-CLc2

In a contango market, prompt prices are lower than those in future months encouraging traders to store oil.

“The extreme contango in WTI also tells us that no one in America wants oil in the short-term,” Oanda’s senior market analyst Jeffrey Halley said.

Grim forecasts from the Organization of the Petroleum Exporting Countries (OPEC) and the International Energy Agency on the outlook for oil consumption have reinforced the bearishness.

The oil industry has been swiftly reducing output in the face of an estimated 30% decline in fuel demand worldwide due to the coronavirus pandemic.

Production cuts from OPEC and allies including Russia will kick in from May. The OPEC+ group has agreed to reduce output by 9.7 million bpd.

“There’s still some concern that the 10 million barrels per day cut won’t be enough to offset demand destruction so the outlook for oil prices remain subdued,” McCarthy said.

Officials in Saudi Arabia have forecast that total global supply cuts from oil producers could amount to nearly 20 million bpd, but that includes voluntary cuts from nations like the United States and Canada, which cannot simply turn on or off production in the same way as most OPEC nations.

North American exploration and production companies have cut their budgets by roughly 36% on a year-over-year basis, according to a Sunday note from James West, analyst at Evercore ISI, while international companies have cut budgets by 23%.