Oil is experiencing rare oversupply that's threatening to further whipsaw the market and drive prices even lower

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  • US West Texas Intermediate for May delivery slumped to its lowest level in 21 years and is now nearly $US12 lower than the June WTI contract.
  • It’s the largest-ever spread between spot prices and future ones, a rare situation called contango that signals near-term oversupply.
  • The coronavirus pandemic has cratered demand, creating a supply glut. Now, industry watchers are worried about storage.
  • Read more on Business Insider.

Oil has fallen into a rare situation as an expiring futures contract injects extra volatility into an industry already reeling from oversupply and cratering demand.

US West Texas Intermediate futures slumped on Monday and are now at the widest level ever for those from the following month. This is a situation called contango, where futures prices are higher than spot prices. It signals that there is an oversupply of oil and weak demand.

In addition, current contracts expire on Tuesday, adding further volatility to the market. When futures contracts expire, traders often rush to buy new ones, sending subsequent prices higher.

The current May WTI contract on Monday fell by as much as 40% to $US10.87 per barrel, a 21-year low. The June WTI contract expiring May 19 fell more than 9% to $US22.68 per barrel the same day. That leaves a spread of $US11.81 – the largest on record.

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The contango is occurring because industry watchers are immediately worried about storage issues for May delivery. As the coronavirus pandemic continues, consumption has fallen sharply as flights are cancelled and consumers are encouraged to stay at home.

That’s sent the amount of oil in storage up – last week, US crude stockpiles rose by 19 million barrels, according to the US Energy Information Administration. It was the largest one-week increase in history. The hub now has 55 million barrels, and about 76 million barrels of capacity, according to the EIA.

Storage could soon become an issue if the market continues to have a supply glut. Still, the coronavirus pandemic continues to threaten demand.

“The economic situation is locked up with no real clarity about what lies ahead, so there’s no reason to expect demand to increase over the near term,” Reid Morrison, PwC’s US energy leader, told Business Insider.

Producers are now taking action, but it will likely be months before daily production meets daily demand, he said. In addition, extra oil being put in storage will satisfy any demand growth.

“The future contracts will remain in contango until the demand outlook pivots from the worst-case scenario because the markets are biased towards the worst case,” Morrison said.

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