Oil is again approaching $100/barrel amid the conflict in the Middle East, but on April 20, 2020, in the midst of the coronavirus pandemic, oil prices fell below zero.
It seems unthinkable, but on that day, US WTI oil prices fell by more than 250%, eventually closing at -$37.63 per barrel.
It was the first time that US oil fell into negative territory, with the entire planet going into quarantine.
What does this mean in practice? Faced with a dramatic drop in demand, as factories closed and people stayed at home, oil producers paid any price to get rid of oil, fearing they would have nowhere to store it, writes Money Review.
Of course, this did not mean that drivers could fill up their cars with gas for free.
The decline in the WTI price was partly a technical move, due to the very nature of the global oil market.
Oil is mainly traded in the form of forward contracts. These are agreements that an investor enters into to buy or sell oil at a certain price in the future. These contracts “expire” monthly, at which point the counterparty holding the contract accepts delivery of oil from the issuer.
The oil price we hear on the news is usually the next month's contract price.
For example, if an airline or refinery needs oil, it can buy futures contracts to “lock in” a certain price and be sure of the price.
However, some people simply want to “bet” on the price of oil. They don't want the oil delivered, they simply want to profit if the price goes up. So at the end of the month, I usually sell the expiring contract and buy the next month's contract (this is called a roll over).
So, with the May WTI contract expiring on that day, those who had bought it had to either be prepared to take delivery of the oil or sell it to someone.
But WTI oil is delivered to only one place: an oil hub in Cushing, Oklahoma. And all available storage tanks in Cushing were already full.
This meant that anyone who held a May contract would receive WTI oil but had nowhere to store it.
It's worth noting that June WTI contracts also fell that day, but were moving in positive $20 per barrel territory.
In the US and other parts of the world, oil companies were forced to cut production in response to reduced demand, but this was not enough to change the big picture: The planet had more oil than it could use or even store.
