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Storage Fears Spark Epic Collapse for WTI Crude

Widespread social distancing due to the coronavirus has dragged down gasoline consumption and storage utilization is rapidly climbing.

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West Texas Intermediate crude spiraled into negative territory on April 20, as oil traders essentially played a high-stakes game of musical chairs. Widespread social distancing due to the coronavirus has dragged down gasoline consumption and storage utilization at the Cushing hub is rapidly climbing. Storage utilization has been sharply rising for the U.S. overall in recent weeks due chiefly to the dearth of oil demand because of COVID-19. However, utilization in Cushing has surged the most, going from 50% in early March to 72% by April 10. If this rate of increase continues, Cushing’s tanks will be full by mid-May. Practical limits could be reached much earlier than that, given that utilization never rose above 90% in the prior oil downturn in 2016.

That makes front-month futures contracts much riskier than usual--nobody wants to take physical delivery if there’s nowhere to store it. In the scramble, some investors paid as much as $40 per barrel to offload futures for May delivery because if Cushing does get full it could cost even more to find an alternative home for physical barrels at the time of delivery. The price of the front-month WTI contract, which expires April 21, fell from $20/bbl to negative $38/bbl over the course of the trading day. However, the significance of the decline was probably overblown by media coverage given that longer-dated futures were impacted far less severely (the June and December contracts fell 20% and 3%, respectively). And for now at least, storage fears appear to be largely confined to the U.S. (front-month Brent only fell 9% to $26/bbl).

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Dave Meats does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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