The price for a barrel of West Texas Intermediate crude to be delivered next month plunged 93% to $1.21 in Monday’s trading, the lowest price since the futures contract was launched in 1983. If that barrel were to be delivered to a buyer in November, it would be worth more than twenty five times as much, The Wall Street Journal reported.
The unusually large difference in price between oil now and then has traders filling up tankers and setting them adrift. The bet is that the coronavirus pandemic runs its course and later this year demand for oil, and thus its price, will jump.
Some may have little else to do with their oil other than put it on a boat, given the historic collapse in transportation fuel demand that has accompanied shelter-in-place orders around the world aimed at slowing the spread of the deadly virus. Producers have been running out of places to send crude as refineries choke back their output to match the meager demand for gasoline or jet fuel.
The price gap widened Monday with expiration of the May futures contract set for Tuesday. The price of oil futures converge with the price of actual barrels of oil as the delivery date of the contracts approach.
“If you can find storage, you can make good money,” said Reid I’Anson, economist for market-data firm Kpler Inc.
Increasingly, traders are looking offshore. Lease rates have soared for very large crude carriers, the 2-million-barrel high-seas behemoths known as VLCCs.
The average day rate for a VLCC on a six-month contract is about $100,000, up from $29,000 a year ago, according to Jefferies analyst Randy Giveans. Yearlong contracts are about $72,500 a day, compared with $30,500 a year ago. Spot charter rates have risen sixfold, to nearly $150,000 a day.
Day rates rise as the spread between oil-futures contracts widens. The basic math is that every dollar in the six-month spread equates to an additional $10,000 a day that can be paid for a VLCC over that time without wiping out all the oil-price gains, Giveans said.
May delivery futures of Brent crude, the international benchmark typically used to price waterborne oil, ended Friday at $28.08 a barrel. The contract for November delivery settled at $37.17. The $9.09 difference wouldn’t justify a $100,000 day rate, but the record spread of $13.45 reached on March 31 does, the Journal adds.