Many predicted that West Texas Intermediate crude oil could trade as low as $15 a barrel during the Saudi-Russia price war. Some even speculated it could hit $5 when figuring in the demand crater due to the global pandemic. No one predicted this. There simply isn’t a proper word to use here — unprecedented, catastrophic, unimaginable — none fit.

What happened yesterday, Monday April 20th, was simply a bizarre collection of circumstances which came together to send WTI prices into the graveyard, dropping by over 300% to negative -$37.00.

How can oil trade for less than zero? Those circumstances need to be understood before panic in the upstream market sets in.

First, when an oil contract comes due, it requires the buyer to take physical possession of the oil purchased. The May contract expired Tuesday, meaning, if you bought it, you had to take it. And that means you had to have somewhere to put it. That condition alone sparked the sell off.

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The second circumstance that led to this bizarre negative pricing has to do with the terrible state of global oil demand. When a billion people are locked in their homes, demand for fuel drops.

Circumstance three is related to the second. With less demand, if pump jacks keep pumping, that oil has to be stored – long term. Brent crude is priced, basically, in the middle of the North Sea. Right now, storage is accessible and flexible as the ocean has no road limitations. Brent Prices remained in the mid $20’s yesterday.

But WTI oil storage is landlocked, making transportation to other storage facilities more costly. When storage near Cushing fills up, there’s really few place to go. Cushing is nearly full.

Circumstance four is directly related to number three. If storage is limited, then the cost of storage will skyrocket… which it did. As a result, those in possession of May contracts for oil that came due Tuesday needed to sell as quickly as possible or they would have been forced to pay rather outrageous sums to store it.

In the face of truly horrendous losses in paying large sums for long term storage, as prices began to tank, traders realized – it would be better to actually pay others to “buy” their contracts rather than be stuck with storage costs.

That’s what happened Monday. Though WTI has bounced back above zero in overnight trading, it is again under zero. Prices should come positive again this week. But even at $15 a barrel, with storage nearly full, producers are now seeking long term solutions to the glut.


Eric Sharpe
About The Author Eric Sharpe
Eric Sharpe is editor and feature contributor of Energy Ink Magazine, which covers the energy industry in the Rocky Mountain West and Northern Plains. He holds a Master’s degree in Educational Technology from Pepperdine University.

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