West Texas Intermediate futures sank to the lowest since May 2003, breaching the level reached in January, and the contango between front-month and second-month contracts increased to the widest in five years. Supplies at Cushing, Oklahoma, the biggest U.S. oil-storage hub, rose to a record 64.7 million barrels last week, according to government data. The site is considered full at 73 million barrels.

Oil is down 29 percent this year on speculation a global glut will persist as Iranian exports increase after the removal of sanctions and U.S. crude inventories remain swollen. U.S. stockpiles are more than 130 million barrels above the five-year average, even after dropping by 754,000 barrels last week, according to Energy Information Administration data.

"Oil has become so disconnected to the cost of getting it from the ground that now we’re trading on round numbers," said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. "The next target is $25 and then we’ll head to $20. Oil in the teens is a real prospect in the near future."

WTI for March delivery dropped $1.24, or 4.5 percent, to settle at $26.21 a barrel on the New York Mercantile Exchange. Total volume traded was 88 percent higher than the 100-day average. The March-April spread widened to $2.62 a barrel, widest gap for the first two contracts since 2011.

WTI pared its loss after the close, following a tweet from a Wall Street Journal reporter that cited the United Arab Emirates energy minister saying in a Sky News Arabia interview that OPEC was ready to cooperate on an output cut.

Brent Premium

Brent for April settlement declined 78 cents, or 2..5 percent, to end the session at $30.06 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude closed at a $1.23 premium to the April WTI contract.

"The Brent-WTI spread is widening again, which has me wondering if we are getting close to seeing a rise in exports," said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $3.6 billion in assets. "It would be good for WTI, not so for Brent."

Traders are looking again at using supertankers as temporary storage facilities to profit from contango, when prices of oil for delivery today are lower than those in future months.

"This is a hangover from yesterday’s Cushing data," said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. "Global equities, currencies and bonds are being taken as negative demand indicators."

U.S. crude imports fell 14 percent to 7.12 million barrels a day last week, the biggest decrease since December 2014, according to the EIA report Wednesday. Crude output declined by 28,000 barrels a day to 9.19 million a day, dropping for a third week.

"A lot of the weakness in last week’s number was due to imports, which jump around a lot," O’Grady said. "The trend is unmistakable, and inventories will resume their rise."

 

(Bloomberg)