Physical crude prices slumped worldwide on Monday, falling faster than comparable benchmark futures as merchants offered big discounts on shipments and the market braced for a flood of oil from Saudi Arabia and Russia.
Key markets where producers and refiners trade oil were showing weak pricing for shipments not due to arrive until May, a signal that even as both US and Brent crude benchmarks have slumped to the low $20s this month, the market may fall further.
The oil market is caught between a dramatic collapse in demand due to the coronavirus pandemic, and the price war between Saudi Arabia and Russia, which are both expected to overwhelm markets with oil in the coming weeks. Oil merchant Trafigura estimated a 30 percent decline in oil demand on Monday as a result.
“Crude oil is getting severely discounted because the demand destruction is far outpacing the industry’s ability to find a place to put crude oil,” said Andy Lipow of Lipow Oil Associates. “And the deeply discounted prices for May is showing that storage is rapidly filling up.”
Refineries worldwide have started to shut units, with some closing outright, while major operators like India’s IOC have declared force majeure on crude purchases as they struggle with the sudden stoppage in demand due to the pandemic.
Oil prices have already lost more than half their value in March alone, but Bank of America analysts said both the US and Brent benchmarks will fall into the teens by the end of March.
Action in physical markets can serve as a precursor to what happens in futures. The United States’ flagship crude oil grade priced in the heart of the Permian Basin plunged on Monday to trade at about $10 a barrel, weakest since late 1998 as demand plummeted and storage filled quickly.
That grade, West Texas Intermediate crude (WTI) at Midland WTC-WTM, traded as low as $9.75 below the US benchmark, which settled near $20 a barrel on Monday.
The price differential for key North Sea grade Forties BFO-FOT fell to a record low at minus $3.25 a barrel versus benchmark dated Brent on Monday. Dated Brent is the physical European benchmark, used to price over half of the world’s crude oil.
In a sign of increased desperation as demand dries up, traders were offering May cargoes of WTI Midland to Europe, unusually far in advance. Typically, cargoes for May delivery don’t surface until at least April.
On Monday, commodities merchant Mercuria was offering three May cargoes carrying WTI-Midland at dated Brent minus $3.40 for Rotterdam delivery, while Trafigura offered the same at minus $4.10 a barrel.
“Get it off before there aren’t any more bids! Get to the front of the queue!” one European trader said, adding that he too was offering far in advance.
Export barrels at the US Gulf were also offered at record discounts to US futures, traders said, another signal of slumping demand.
US refiners are cutting output, forcing pipeline operators to tell producers to stop sending barrels without proof of buyers, lest pipelines be stuck with barrels. However, some producers that locked in space on new arteries to the US Gulf are forced to ship those barrels due to long-term shipping agreements - meaning they are now flooding the coast with cheap crude.
WTI at East Houston MEH crude WTC-MEH, one of the biggest Gulf Coast export grades, traded at $6 below benchmark futures, lowest on record. Mars crude WTC-MRS, the US Gulf sour benchmark, weakened to $8 below futures, lowest since 2008.
Canada’s Western Canadian Select heavy oil for April delivery in Hardisty, Alberta, traded at about $7 per barrel, a discount of $13 to US futures, according to NE2 Canada Inc, though volumes were thin.
Mexico’s Maya heavy crude, the primary Latin American oil price benchmark, fell to $9.24 per barrel on Monday, according to S&P Global Platts, the first time it hit the single digits in over 18 years.
Kazakhstan’s CPC Blend BFO-CPC fell to a record low at minus $7.65 a barrel on Monday.SHOW MORE