Oil prices whipsawed on Tuesday as investors and index funds rushed out of near-term futures contracts for fear that the financial instruments may repeat last week’s plunge into negative territory.
The world is awash with too much oil at a time when coronavirus lockdowns on driving, flying and industrial activity have all but eliminated the need for the stuff.
That has commodity investors eschewing oil in the near term and pushing out their exposure to prices later in the year in hopes that swaths of the economy will be reopened then and normal fuel consumption will resume.
Some U.S. states, including Georgia, have allowed businesses to reopen. Governors of some others, including Ohio and Texas, have outlined plans to ease stay-at-home orders in the coming days.
June futures contracts for West Texas Intermediate—the main U.S. bellwether—dropped nearly 20% to $10.24 a barrel in early trading before shooting up to around $13.56 a barrel, or 6% above Monday’s close, after President Trump tweeted his approval of Texas’s plan to reopen businesses.
The price rise was short lived, though, and the June contract resumed its slide by late morning. At midday, WTI was down 7% to $11.89. Later-dated futures contracts bounced between gains and losses in erratic trading.
Brent crude, also up early, dropped to $22.87 a barrel, or about 0.9% on the day. The global benchmark traded at a massive difference to WTI because of severe bottlenecks in storing oil in Cushing, Okla., where the U.S. contracts are settled.
A lightly traded futures contract for WTI traded for negative prices last week, spooking markets and prompting investors to race out of contracts that require them to take delivery of oil in the coming months. Most oil watchers consider the most actively traded contract at any given time as the price that best reflects market conditions.
The selloff picked up steam early Tuesday as investors sold the June contract and bought into ones that are tied to oil delivered in months down the road, said Giovanni Staunovo, commodity analyst at UBS’s Chief Investment Office.
“Everyone’s running out of the contract and they don’t want to be the last ones on the train, so that’s not helping prices,” Mr. Staunovo said.
S&P Dow Jones Indices said after Monday’s market close that it would remove the June U.S. crude contract during Tuesday trading hours from its widely followed indexes that track the oil market, and switch to the July contract.
The move, which S&P said would include the S&P Goldman Sachs Commodity Index, comes earlier in the trading month than usual, and was “based on the potential for the June 2020 WTI Crude Oil contract to price at or below zero,” the index announcement said. BlackRock’s iShares S&P GSCI Commodity-Indexed Trust exchange-traded fund tracks that index and had around $400 million of assets as of April 27, according to the fund website.
That followed a decision by the United States Oil Fund—the largest exchange-traded fund that attempts to track oil prices—to sell its positions in the June contract and purchase positions in contracts several months away.
The crash in prices, and the dip into negative territory for the May contract last week, highlighted the dangers associated with holding oil futures that expire soon. Some contracts require owners to take delivery of oil when the contracts expire. With oil tanks and pipelines full, some oil investors were forced to unload the right to collect that oil and pay the buyer to do so.
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Many fear that negative oil prices could happen again. Prices on WTI contracts for July delivery have also come down in recent days to less than $20 a barrel. Contracts for delivery at the end of the year are at about $28 a barrel.
Government-imposed lockdowns aimed at preventing the spread of the new coronavirus have suffocated global oil demand. Oil majors, frackers and national oil companies around the world have raced to shut off wells. A curtailment pact among major oil-producing nations that will hold back approximately 13% of global supply takes effect on Friday.
But investors worry these measures won’t relieve the supply glut fast enough.
A pump jack is pictured as a storm moves in Oklahoma City.
Photo: Sue Ogrocki/Associated PressA lack of space to store oil onshore in the largely landlocked U.S. market has pushed U.S. prices lower, said Bjarne Schieldrop, chief commodities analyst at SEB Markets. The hit to Brent prices, which are tied to oil produced in the North Sea, has been less severe. The Brent market is largely seaborne and space to store oil offshore remains. But as long as production continues amid weakening demand, space will run out, Mr. Schieldrop added.
“The final crunch point in time is still ahead of us,” he said. “Supply and demand will be forced to align meaning that production will have to shut down. That will be the final low point, but we are not there yet.”
Investors will keep a close watch on U.S. inventory data due out this week, with American Petroleum Institute stock-level data expected later Tuesday.
Write to David Hodari at David.Hodari@dowjones.com and Caitlin Ostroff at caitlin.ostroff@wsj.com
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