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Oil Price Crashes Below Zero as U.S. Crude Suffers Historic Meltdown

Last Updated September 23, 2020 1:50 PM
Sam Bourgi
Last Updated September 23, 2020 1:50 PM
  • U.S. crude futures suffered a historic selloff on Monday as WTI turned negative for the first time.
  • The May futures price bottomed at -$40.32 after closing at $18.27 on Friday.
  • Brent crude, the international futures benchmark, is trading at its lowest in almost two decades.

The price of U.S. crude crashed to unspeakable lows on Monday, sparked by months of falling demand and a rapid decline in storage space.

WTI Flips Negative

The West Texas Intermediate (WTI) benchmark for U.S. crude futures turned negative on Monday. In practice, this means producers will have to pay customers to take their deliveries.

WTI’s May contract bottomed at -$40.32 a barrel on the New York Mercantile Exchange. On Friday, the contract closed at $18.27 a barrel. The more than 250% decline is easily the largest on record.

West Texas Intermediate
WTI’s alarming decline. | Chart: Yahoo Finance 

WTI’s May contract expires on Tuesday. Contract expiry is usually associated with lower than usual trading volumes and more extreme market moves . Heading into the Tuesday close, traders can expect further volatility.

While nowhere near negative, international benchmark Brent crude also declined sharply on Monday. The contract fell $2.59, or 9.2%, to $25.49 a barrel.

The Perfect Storm for Oil

Despite unprecedented volatility, the negative price point for WTI wasn’t entirely unexpected. As CCN.com reported more than a month ago, negative prices were always possible as storage facilities ran out of space to store their excess crude. The situation became worse after Saudi Arabia launched a price war against Russia  by slashing its forward price on crude.

Just a few hours ago, oil prices were at multi-decade lows. The selloff quickly became the biggest on record after WTI’s May contract flipped below zero in the early afternoon. 

But the selloff intensified in April even after Russia and the Organization of Petroleum Exporting Countries (OPEC) agreed to slash production by 10 million barrels per day. Some say it was too little, too late.

The reality is the supply cut was nowhere near what was needed to offset declining demand due to coronavirus. Some analysts estimate as many as 25 million barrels per day in lost demand due  to the global lockdown.

With refineries processing much less crude than normal, 160 million barrels have made their way into storage facilities around the world .

In the United States, the key Cushing, Oklahoma storage site is nearing full capacity, which largely explains the oversized decline in the May futures price. At the time of writing, WTI’s June contract  was trading at a much more stable $21.00 a barrel.

Contango Market

Suffice it to say, crude markets are in a state of contango  at the moment as traders bet on a price rally in the future.

A contango market is when the futures price becomes incrementally more expensive the further out you go in the term structure. In other words, traders are betting that crude prices will rise in the future–an environment that encourages market participants to store now and sell later.