US oil sinks towards $10 as fund sells off holdings

US oil nosedived towards $10 a barrel Tuesday after a major exchange-traded fund started selling its short-term contracts of the commodity, and storage concerns mounted as the coronavirus strangled demand.

In morning London deals, West Texas Intermediate crude for June delivery tumbled more than 21 percent to $10.07 — having plunged 25 percent a day earlier.

International benchmark Brent crude slid 4.9 percent to trade at $19.01 a barrel.

The latest market drop was driven by the United States Oil Fund — a massive, oil-backed exchange-traded fund (ETF) — saying it would sell all its holdings in the contract for June delivery.

By investing in longer-dated contacts, the fund’s move put pressure on the June contract, analysts said.

The move highlighted continued concerns that storage is filling up and that when futures contracts do expire, buyers may find there is little space to put the oil they have purchased.

“Oil is back in focus, with the June WTI contract plunging again as the largest US oil ETF plans to offload all of its holdings of the contract in the coming days and instead buy up longer-dated contracts,” OANDA analyst Craig Erlam told AFP.

“I am sure they are not the only ones that have learned the lessons of last week and opted to avoid another episode in the coming weeks.

“This certainly puts downside pressure on prices in the near-term though as traders look to get in ahead of the fund and avoid heavy losses of their own.”

Demand for the commodity has collapsed owing to lockdowns and travel restrictions imposed worldwide to fight the virus.

WTI tanked below zero for the first time last week, hitting a low of minus $40.32 per barrel on April 20 as investors scrambled to offload it before the expiry of the May contract — but could not readily find buyers with sufficient places to store crude.

Oil storage concerns have overshadowed signs that some countries are starting to slash production in line with a major agreement hammered out this month.

Top producers have agreed to reduce output by 10 million barrels a day from May to shore up markets, a deal that marked an end to a price war between Russia and Saudi Arabia.

Prices have won background since falling into negative territory last week, but remain at their lowest levels in years.