Oil prices go negative - sellers have to pay buyers
The negative price shows that sellers are willing to pay nearly $40 to buyers to avoid holding oil when demand is in free fall and storage fees are expensive.
Stores almost never pay customers to take their goods away, except in rare cases, as happened in the US crude oil market on April 20. WTI crude for May delivery had an unprecedented day of volatility, falling to minus $37.63 a barrel – the first time in history that it has gone below zero.
Futures contracts typically expire at a fixed date. As the expiration date approaches, the futures price tends to move toward the actual price of the commodity on the market, as buyers arrive to take delivery of the commodity.
Many people buy oil futures contracts to speculate. They bet on price movements to make a profit, rather than buying actual barrels of oil. As the expiration date approaches, they move on to the next futures contract, in this case the June contract. The June WTI contract fell 16% yesterday to $21.04 a barrel. That means that when the May contract expires today, the price will be back above $20.
Oil producers are now finding it difficult to find storage for their products. Photo:Reuters
In addition, in the current situation of sharp price declines, speculators face two choices – sell at a loss or find storage space and incur additional storage costs when the contract expires. In the current situation of huge oversupply, storage facilities are increasingly filling up, making empty spaces increasingly expensive.
The second group are institutions with real demand, such as refineries or airlines. They do not sell futures contracts ahead of time and usually wait until they expire to buy.
But with the pandemic causing unprecedented demand losses and storage tanks filling up, there is no appetite for oil. Planes are grounded, shipping has slowed, and American consumers—who consume 10% of global oil to power their cars—are now staying home. The U.S. Energy Information Administration (EIA) said last week that as of April 10, storage at Cushing, Oklahoma, was 72% full.
That’s why oil prices fell below zero yesterday. Oil producers are willing to pay to get rid of crude, because no one wants it right now, with the economy in lockdown. It’s cheaper for them than shutting down production or finding somewhere to store it.
Francisco Blanch, head of commodities at Bank of America, said that under normal circumstances, consumers would buy when prices fall. But that principle is not working now because of the lockdowns. "The world has never stopped like it has in the past few weeks. That is what makes this crisis different from the recession," he said. "Oil companies are facing the most severe challenges."
Over the past two to three months, about 30 million barrels of oil have been taken into storage every day due to the collapse in demand. And even when demand returns to pre-pandemic levels, it will take a long time for the world to burn through those reserves.
Oil prices for June delivery are now above $20 a barrel, not yet negative but falling rapidly. “The energy market is signaling that demand is not coming back anytime soon. And the oversupply is here to stay,” Kevin Flanagan, director of fixed income strategy at Wisdomtree Asset Management, told Reuters.