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Production cuts too slow to support oil price with storage running out

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Following the historic fall of the West Texas Intermediate (WTI) futures price for May delivery into negative territory, going as low as negative US$37.6 per barrel, Adrian Lara, Senior Oil & Gas Analyst at GlobalData, a leading data and analytics company, offers his view on the current events:

"WTI is just getting too much downward pressure from both the futures and the physical markets. This historic price drop into negative territory is signalling that US oil supply is still excessive and that production cuts are not occurring rapidly enough to avoid filling up storage.

"Fundamentally there is little doubt US storage won't be enough by late May-early June if crude oil production remains at the current rate, and refining capacity does not increase. With most of the country in lockdown until at least mid-May, staying at the current low levels of refining processing is the most likely scenario. In particular, storage in Cushing is expected to be filled up by end of May and this has already been pressuring the WTI spot price and then on top of it came the mismatch between the May futures contract and subsequent months.

"The large spread between the May and June contracts is primarily indicating both the limits of storage and the increasing cost of keeping oil above ground. Today this differential obviously went out of control when oil traders desperately tried to exit or rollover their positions, to avoid taking delivery of the May crude. Still the June contract was trading above US$21 per barrel and this price should in principle have more weight on spot price as of Tuesday.

"However, with no real certainty on when the US lockdown will end and how quickly the economy will start transporting people and goods, the downward pressure on WTI will continue during the next months."

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