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Oil futures were mixed Friday, with the nearby May contract for U.S. crude plunging as it nears expiration, reflecting fears over tight storage amid a global glut.
West Texas Intermediate crude for May delivery CL.1, -7.39% was down $1.25, or 6.3%, at $18.62 a barrel, while the June contract CLM20, +0.35% rose 19 cents, or 0.7%, to $25.73 a barrel, steepening the contango curve — a situation in which deferred contracts trade above the nearby.
The move “ highlights the lack of storage availability as long positions rush to get out instead of risking taking delivery of barrels they can not store,” said Ole Hansen, head of commodity strategy at Saxo Bank.
“This development highlights the challenge to all those investors who have bought into oil this month purely from the narrative that it is historically cheap,” he said. “It is cheap for a reason and the very elevated contango highlights a very oversupplied market where production needs to be reduced in order to avoid running out of storage.”
The global benchmark, Brent crude for June delivery BRN00, +1.94% , rose 58 cents, or 2.1%, to $28.40 a barrel on ICE Europe.
The WTI price action also indicates the market expects massive production cuts in response to price by U.S. producers to reduce the surpluses, said Eugen Weinberg, commodity analyst a Commerzbank, in a note.
In addition to voluntary cuts, there’s also the possibility the Railroad Commission of Texas could move as early as next week to limit output in the state, though such a move could be very difficult to implement due to technical and legal reasons, Weinberg said.
A plan reportedly being considered by the Trump administration that would see the government pay producers to keep crude in the ground may be more promising, he said.
Hansen said the near-term risk, however, is that the June WTI contract drops back toward $20 a barrel “for the same reasons that the expiring May has collapsed to $18 — not enough demand and to high production.”
Barbara Kollmeyer contributed to this report.
