U.S. benchmark oil prices finished with a loss on Tuesday, giving up an earlier spike to intraday highs on the back of a report of a bomb explosion on an oil tanker in Syria.
The explosion on the tanker in the northern Syrian city of Afrin killed at least 10 people, Reuters reported, citing initial reports from Turkey’s state-run Anadolu news agency Tuesday.
News of the bomb detonation led to a rise in oil’s “risk premium, even in a market with a glut of crude,” Phil Flynn, senior market analyst at The Price Futures Group, told MarketWatch. “Still, we need to find out if this was a one off incident and who the perpetrators turn out to be.”
Against that backdrop, the front-month June West Texas Intermediate crude briefly traded as high of $13.69 a barrel before turning lower again to settle down by 44 cents, or 3.4%, at $12.34 a barrel on the New York Mercantile Exchange. It had been trading as low as $10.07 before news of the tanker explosion.
“Oversupply conditions will have [storage] tank tops reached in the coming weeks,” said Edward Moya, senior market analyst at Oanda, in a note. “Oil trade will remain volatile, but any major relief rallies will likely be heavily sold into until the entire energy space starts delivering deeper production cuts.”
Analysts have said that traders fear a rerun of the May contract’s collapse, which caused some investors to move out of June contact earlier than would be expected.
Warren Patterson, head of commodities strategy at ING, noted that open interest in the June 2020 contract fell by 44% over the course of last week.
“This is an early exit from the contract, when you consider that the Jun-20 contract is set to only expire on the 19 May. The move we are seeing suggests that the Jun-20 contract is going to become increasingly illiquid, and as a result, will likely suffer from increased volatility in the lead up to expiry,” he said, in a note.
After the market closed on Monday, S&P Dow Jones Indices said it would “pre-roll WTI Crude Oil to the July 2020 contract month for all S&P DJI commodity indices, including the S&P GSCI family, which currently holds the June 2020 WTI Crude Oil contract.”
On Monday, the world’s biggest oil exchange-traded fund, United States Oil Fund LP said it would further cut holdings of crude contracts in specific months, leaving it with 30% of its holdings in the July futures contracts, and 15% in each of the August, September, October, and December contracts.
Meanwhile, June Brent crude, the international benchmark, climbed by 47 cents, or nearly 2.4%, to $20.46 a barrel, after a 6.8% drop to $19.99 on ICE Futures Europe on Monday. The contract fell 23.7% last week.
Storage capacity around the world is dwindling as economic shutdowns due to the global pandemic has weighed on demand for oil.
“WTI being land locked and settled in Cushing is going to be the more volatile crude,” said Tariq Zahir, managing member at Tyche Capital Advisors. Cushing, Oklahoma, is the delivery hub for Nymex crude oil futures.
“Storage is rapidly filling up and with USO changing which contract they are in and the GSCI saying roll from June to July. We will continue to see extreme volatility in the June WTI contract,” he told MarketWatch.
“It wouldn’t surprise me to see WTI in the high teens to the high single digits—that’s how extreme the volatility is there,” Zahir added. It’s a fact that “demand is going to take a long time to come back and supply is running out of places to store it.”
Back on Nymex, May gasoline rose 2.9% to 66.72 cents a gallon and May heating oil added 3.3% to 63.08 cents a gallon.
May natural gas, which expired at the end of the day’s session, lost 1.4% to $1.794 per million British thermal units. June natural gas, now the front month, settled at $1.948, up 1.7%.
Source Market Watch