Oil plunged into negative territory for the first time on record on Monday. The commodity's latest round of sharp selling came as uncertainty mounted about storage for excess oil. Demand for crude has plummeted since the coronavirus outbreak froze activity worldwide.
The price of West Texas Intermediate crude oil futures expiring in May plunged 321%, to -$40.32 a barrel, the lowest level ever recorded. Brent crude losses were muted by comparison, with the commodity sliding 9.5%, to $25.41 a barrel at intrasession lows.
The price of oil has continued to slide even after OPEC and its allies agreed to the biggest-ever production cut — one intended to backstop prices. Investors remain unconvinced that the cuts can offset cratering demand for the commodity as the novel coronavirus pandemic keeps society from operating normally.
WTI crude for May delivery has traded at large discounts to longer-dated contracts. That dynamic is playing out amid worry that a key storage hub in Cushing, Oklahoma, is nearing capacity, according to Bloomberg.
"Basically, bears are out for blood," said Naeem Aslam, the chief market analyst at AvaTrade. "The steep fall in the price is because of the lack of sufficient demand and lack of storage place given the fact that the production cut has failed to address the supply glut."
He added: "The bottom line is that there is no doubt that oil prices are way oversold at the current level, but given the circumstances, it is likely that the price may continue to fall further because the rig count hasn't touched its bottom yet."
As the coronavirus pandemic stretches into 2020, the cost of crude oil plummeted to less than $0 per barrel on Monday.
What does that mean? Most on Twitter are confused.
Social distancing orders and self-quarantine mean that many oil suppliers have an excess of crude oil, since energy needs are down. Because the United States is nearly out of storage to keep crude oil, Politico reports, the cost per barrel for oil to be delivered in May fell to a record -$37.63 on Monday. That means that those contracted to produce oil were literally paying buyers to take it off their hands.
While tankers are near-overflowing with oil, the jokes flowed on Twitter
CRUDE OIL TALKING POINTS:
- The May contract for US-based WTI crude oil futures printed a negative price for the first time in history and eventually cratered to a -$37.63 settlement
- An important qualifier is that the May contract expires Tuesday and much of the oil market had already rolled forward to the June contract
- While this means that fewer people were participating in this extreme situation, it doesn’t absolve the extraordinary conditions behind the energy market
Crude oil hit an unprecedented benchmark this past session. Through US trade, the ‘front month’ (also referred to as ‘active nearby’) US-standard grade crude futures contract posted its first negative print on record…and then went on to collapse for a settlement price of -$37.63 per barrel. Yes, that is negative 37 dollars per barrel. All things considered, this is an incredible development for one of the most important markets for the global markets and economy.
These developments do reflect extraordinary circumstances such as the sudden shuttering of many of the largest economies in the world in the fight against the coronavirus spread and the subsequent glut of supplies in the necessary commodity. OPEC+ recently attempted to cut its production (by 9.7 million barrels per day) to combat the slide in prices, but the mechanics of a deep recession prevailed. Yet, as incredible as this shocking flip is, there are caveats that indicate the world is not as topsy-turvy as this would initially lead us to believe. You would perhaps start to understand that when looking at the other global standard for oil – Brent Crude – or look at a futures table chart. Let’s look at the situation here.
First and foremost, it is important to verify that the negative US oil price was real and will be in the history books. That said, in the futures markets, there are contracts of similar grade underlying that expiry at certain times. It is important to highlight this, as when one contract expires; there is an effort by most that are interacting with the market from a speculative or hedging capacity to ‘roll forward’ – meaning to sell the contract that is expiring in move out into a contract with a later expiration. The May WTI (West Texas Intermediate) contract was the particular one that suffered so extraordinarily – dropping over 300 percent in a single day. However, the proportion of the US oil market that was active in this contract was very small overall. And, as we have seen very clearly these past few months: lower liquidity can leverage enormous volatility.