Futures for May delivery of West Texas Intermediate rose nearly $39 but were still just $1.76 a barrel, after a storage squeeze and collapsing fuel demand crushed prices to eye-popping lows.
The contract expired at the end of trade on Tuesday, which pushed investors to clear them from their books at any price, and June prices at $22 per barrel point to some relief.
But the collapse highlighted intense disruptions globally as the coronavirus pandemic and lockdowns paralyse the world economy, and augurs badly for a swift return to growth.
Asian equity markets followed Wall Street lower. MSCI’s broadest index of Asia-Pacific shares outside Japan fell half a percent. Japan’s Nikkei fell 1%, while bonds and the dollar held gains.
“This is clear evidence of demand destruction,” said Michael McCarthy, chief strategist at broker CMC Markets in Sydney.
“It’s not just relevant to energy markets, this very clear evidence of economic damage…it’s not a matter of just turning everything back on and jumping back into action.”
Even besides the economic signal, the plunge puts fresh and unbearable pressure on producers and has investors worrying about a credit crunch if heavily indebted energy firms collapse or a systemic funding crisis if traders are affected.
May futures settled at minus $37.63 a barrel on Monday, a 306% daily drop, driven by the rapid filling of the United States’ main storage hub at Cushing, Oklahoma – the delivery point for West Texas crude.
“The price action was scary because you’ve got folks wanting to pay other people to take physical delivery of an asset they don’t want to own,” said Kyle Rodda, market analyst at IG Markets in Melbourne.
“It points to the fact that supply and demand has been destroyed…the issue will be that in a month’s time will we be staring down the barrel of the same thing?”
North Sea Brent , the international benchmark and far more easily seaborne, was at $26.25, up 2% on the day.
AWASH IN OIL
The unprecedented dislocations in oil markets come as hopes for a swift recovery from the coronavirus crisis are waning as governments take cautious paths to restarting their economies.
If lessons can be drawn from China, industrial production can be switched back on relatively quickly once anti-virus measures are eased, but consumption will take longer to revive if social distancing and other movement restrictions continue, Oxford Economics said in a note to clients.
In currency markets, the safe-haven dollar gained on riskier majors such as the Australian and New Zealand dollars for a second day and bonds extended Monday’s rally.
The dollar stood at $0.6306 per Australian dollar and $0.6003 per kiwi , while the oil-linked Canadian dollar and Norwegian krone recovered slightly with the bounce in oil prices.
Yields on benchmark 10-year U.S. Treasuries edged lower to 0.6179%.
More than 2.41 million people have been reported to be infected by the novel coronavirus globally and 165,854 have died, according to a Reuters tally.
Debate over the pace of re-start and recovery has already spilled into the streets in the United States, the worst hit nation globally, as protests against lockdowns intensified.
Health experts and lawmakers fear the United States could face a second and even deadlier wave of infections if the lockdowns end prematurely and other countries appear to be favouring a cautious approach.
“The COVID-induced evaporation in demand will keep the oil market under pressure,” said Kerry Craig, global market strategist at J.P. Morgan Asset Management.
“Even as, or if, virus containment measures ease in the coming weeks, the world is going to be awash in oil for some time – economies may be slow to get back up and running to a pace that would warrant a strong increase in demand.”