Crude oil prices continue to fall with steep fluctuations — dropping more than half since the start of the year, as the coronavirus pandemic leaves stock prices low, airlines hurt and supply chains broken.
The collapse of equity markets has added to the downward trend.
Brent crude retreated to $26.98 per barrel and WTI fell to $22.43 per barrel — an 18-year low — as the pandemic creates uncertainty.
Meanwhile the oil futures market has moved into a super-contango, with prompt barrels much cheaper than longer-dated deliveries.
This has prompted refiners and traders to buy cheap crude oil to store and sell later at a higher price.
This gives investors an incentive to wait for a recovery, seeing storage being filled faster than expected, with more supply than demand.
This has caused shipping freight rates to surge and may mean global oil storage capacity is maxed out in months as demand drops further.
The cost of transporting oil on supertankers has soared as refiners and traders scramble to secure vessels to ship more crude. That has increased the cost of loading barrels from Arabian Gulf producers.
The contango market structure has also prompted China to boost the capacity of its strategic petroleum reserves (SPR) to 503 million barrels by the end of this year, an indicator of the maximum amount the government can store. The US currently holds about 635 million barrels in its SPR.
The US took advantage of the low oil price to fill up its own SPR, despite Washington previously seeking to sell it off. Structural change in market dynamics has changed US energy policy: Instead of reducing its SPR, the federal government decided to purchase up to 92 million barrels, enough to buy the entire output of Texas in approximately 18 days.