Oil prices dropped sharply on Tuesday, with U.S. prices sliding back toward $20 a barrel, as investors bet that fuel demand destruction caused by the coronavirus pandemic would be too much for producers embarking on record global output cuts to offset.
Global oil-producing nations are expected to reduce production by as much as 19.5 million barrels per day, but those cuts are being implemented slowly and in some cases will not start for weeks. By contrast, demand plunged by roughly 30% worldwide several weeks ago, causing refiners and producers suddenly stuck with oil to stick it into rapidly filling storage.
U.S. West Texas Intermediate (WTI) crude CLc1 settled at $20.11 a barrel, down $2.30 or 10.3%, as one prominent pipeline executive told Texas regulators that storage would be filled by mid-May.
WTI is not far from where markets traded prior to a rally founded on hopes for the OPEC+ production deal inked over the weekend.
Brent crude futures LCOc1 fell $2.14, or 6.7%, to settle at $29.60 a barrel.
Both benchmarks are down more than 50% down this year.
Analysts have praised Saudi Arabia and other major producers for cutting output, but those producers are playing catch-up to the free-fall in demand.
Plains All American Pipeline (PAA.N) President Harry Pefanis underscored that point at a hearing in Texas on Tuesday, saying that U.S. storage would be filled by mid-May.
“We can’t act as a storage facility for everybody that doesn’t have a market,” Pefanis said at a Texas Railroad Commission hearing, where regulators are considering a cut in state production.
The bulk of the mandated reductions come from the Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+. That group agreed this weekend to cut output by 9.7 million bpd in May and June. The rest from the United States, Canada and others, will come as a result of weak pricing and happen over time.
“With demand destruction forecasts ranging from 15 million to 22 million bpd in April 2020 and these measures not even coming into place until May, we are likely to see a substantial overhang in the short-term,” said Nitesh Shah, director of research at New York-based WisdomTree Investments.
As a result, physical markets where crude is traded, such as in Houston or London, suggest prices will not recover for a while as storage fills.
U.S. crude inventories rose 13.1 million barrels in the week to April 10 to 486.9 million barrels, data from industry group the American Petroleum Institute showed on Tuesday. Analysts had expected a build of 11.7 million barrels, after stocks climbed by a record 15.2 million barrels the previous week.
Official data is due on Wednesday.
“If U.S. storage continued to increase at last week’s all-time record of 15 million, it would take eight weeks for storage in the U.S. to reach maximum capacity,” said Bob Yawger, director of energy at Mizuho Securities.
Enterprise Products Partners (EPD.N) said it was making an existing line available to ship more oil to the Cushing, Oklahoma storage hub, which is rapidly filling due to lack of fuel demand.
U.S. production is starting to drop, the Energy Department said on Monday, with estimated shale output expected to fall by 200,000 bpd in April, a record.
There are signs that the coronavirus outbreak may have peaked in some areas of the world.
In China, where the virus outbreak started and is now largely under control, demand appears to be returning, with data showing crude oil imports rose 12% in March from a year earlier.