June WTI Futures Drops 25%

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- New York Mercantile Exchange oil futures and Brent crude on the Intercontinental Exchange sold off Monday, with June West Texas Intermediate under pressure throughout the session. The front end of the WTI forward curve was dangerously exposed to negative pricing amid a collapse in demand while the underlying Cushing supply hub is fully leased out, according to industry sources.

Although U.S. shale producers are reported to be sharply reducing output, production cuts aren't coming quick enough, with industry sources suggesting it won't be until the third quarter until excess output is shaken out of the market.

Oklahoma Governor J. Kevin Stitt addressed a letter to U.S. President Donald J. Trump on Friday urging the administration to declare the COVID-19 pandemic a "Force Majeure" or "Act of God" event to protect the drillers who want to stop producing but fear they will lose their leases if they do.

"Many operators desire to voluntarily reduce or cease producing on the temporary basis, without fear of parties taking advantage of an opportunity to cancel leases held by production," said the governor.

At settlement, NYMEX June WTI futures dropped back $4.16 or 25% to $12.78 barrel (bbl) a week after the now expired May contract settled at a negative $37.63 bbl. The June contract expires on May 19 and might turn negative ahead of expiration. The July contract widened its premium against the front month contract by more than $1 to a $5.30 bbl.

ICE June Brent futures declined $1.45 to settle below $20 bbl at $19.99 as June options expired Monday afternoon. Next month delivered July Brent closed the session with a $3.08 premium ahead of the June contract's expiration Thursday afternoon.

NYMEX May RBOB futures moved down 1.29 cents to settle at $0.6483 gallon, with next-month June contact narrowing its premium to 3.66 cents ahead of the May expiration Thursday afternoon.

May ULSD futures reversed earlier gains to settle at $0.6104 gallon, edging off a $0.5908 18-year low on the spot continuous chart. Next-month delivered June ULSD futures settled at 0.7036 gallon, widening its premium to 9.32 cents against the expiring contract.

ULSD futures again came under heavy selling pressure from further contraction in the manufacturing sector and falling freight rates as the country went into lockdown this month. More pain is expected for the ULSD complex, with diesel demand closely correlating with economic activity in the United States.

Congressional Budget Office late last week projects U.S. economic growth would tumble 39.6% in the second quarter before recovering in the third quarter. The Bureau of Economic Analysis will release their estimates of first quarter U.S. GDP on Wednesday, with market consensus calling for a 3.8% annualized decline as the country implemented partial containment measures late in the quarter. If estimates are realized, it would confirm the United States is in recession.

Liubov Georges can be reached at liubov.georges@dtn.com

(BAS)

Liubov Georges