Oil Prices Drop Below Zero, What That Means
Currently, there’s little demand for the world’s oil and we’re running out of places to put it.
That, in a nutshell, explains the unprecedented action in the market for crude oil futures contracts Monday, April 20, where traders essentially offered to pay someone else to deal with the oil they were due to have delivered next month.
The price of U.S. benchmark crude that would be delivered in May was selling for around $15 a barrel Monday morning, but fell as low as -$40 per barrel during the day. It was the first time that the price on a futures contract for oil has gone negative, analysts say.
“It’s the worst oil price in history, which shouldn’t surprise us, because it’s the inevitable result of the biggest supply and demand disparity in history,” Ryan Sitton, commissioner at the Texas Railroad Commission, told the Associated Press.
Efforts to limit the spread of COVID-19 have major cities around the world on lockdown, air travel has been seriously curtailed and millions of people are working from home, leading to far fewer commuters on the roads — all things that are leading to record declines in demand for oil.
Sometimes, the price on the future delivery of oil will get skewed by a surprise event, say an oil pipeline bursts. That can cause the price of a futures contract for a given month to be sharply higher or lower than that of the futures contract for the next month.
Usually, this is smoothed out by the market, but the sharp pullback in demand combined with a glut of oil has led to a dearth of oil storage capacity. That made it hard for traders with contracts for crude delivery in May to find buyers, which sent the contract price into negative territory.
“This has never happened before, not even close,” said Tim Bray, senior portfolio manager at GuideStone Capital Management in Dallas. “We’ve never seen a negative price on a futures contract for oil.”
While some companies may be paying others to take away their crude oil, that does not appear to be widespread.
Many analysts described the dip in crude oil prices as technical, related to the way futures contracts are written. Most buyers are currently purchasing oil that would be delivered in June, not May.
Even so, there were more than 150,000 of those futures contracts that traded hands, enough volume to make it meaningful, said Ryan Fitzmaurice, energy strategist at Rabobank.
“In my view, today’s move was more technical in nature and related to the futures contract expiration,” Fitzmaurice said. “We could see isolated incidents where oil companies pay people to take their oil away as storage and pipeline capacity become scarce but that is unlikely on a sustained basis.”
With far less gasoline and jet fuel being consumed, oil tanks are starting to fill up. Experts have been warning that global storage could fill up in late April or early May.
That’s led some producers to decide to move oil now, because the space may become more valuable than the oil, Sitton said.
“There’s so much oversupply, and storage is fulling up,” Sitton said. “Eventually you go to a point where literally there’s so much of a valuable commodity in the world that the commodity no longer has value. And that’s what we’re seeing.”
Earlier this month, OPEC and its allies, with political pressure from the U.S. government, agreed to cut production by nearly 10 million barrels per day — about 10 percent of current global output. But some analysts feel the deal didn’t go far enough to curb massive oversupply. It kept prices from falling farther for the time being, but there’s still too much oil in the world.
Cheap oil leads to cheaper prices at the pump, which are often viewed as a boon for consumers. The average price in the U.S. for a gallon of regular gasoline fell to about $1.49 or less, more than $1 less than a year ago, according to AAA. But this time around, it’s not good for anybody, said Jim Burkhard, vice president at IHS Markit.
“Typically when oil prices fall, gasoline prices fall and that benefits consumers,” Burkhard said. “But prices are falling today because hardly anyone driving, they’re driving a lot, lot less. So it’s difficult for anyone to take advantage of these lower gasoline prices if they’re not driving. So there’s no winner in this situation today.”
( Publisher’s Note: This article includes excerpts from an Associated Press article.)