Oil prices below zero for first time

The day started like any other gloomy Monday in the oil market’s worst crisis in a generation. It ended with prices falling below zero, thrusting markets into a parallel universe where traders were willing to pay $40 a barrel just to get somebody to take crude off their hands.

West Texas Intermediate futures have been the benchmark for America’s oil industry for decades, seeing the market through booms, busts, wars and financial crises, but no single event holds a candle to this. By the end of trading, the contract had slumped from $17.85 a barrel to minus $37.63.

“Today was a devastating day for the global oil industry,” said Doug King, a hedge fund investor who co-founded the Merchant Commodity Fund. “U.S. storage is full or committed and some unfortunate market participants were carried out.”

In one way, it was just an extreme glitch as traders prepared for the expiry of the contract for delivery in May. Elsewhere, the market proceeded as normal — Brent futures, the benchmark for Europe in London, ended the day down sharply, but still above $25 a barrel. WTI for June delivery changed hands at $21 a barrel.

But the negative prices also revealed a fundamental truth about the oil market in the age of coronavirus: The world’s most important commodity is quickly losing all value as chronic oversupply overwhelms the world’s crude tanks, pipelines and supertankers. Ultimately, traders were left desperate to avoid having to take delivery of actual oil because nobody needs it and there are fewer and fewer places to put it.

Despite the OPEC+ deal to cut 10% of global production, lauded by U.S. President Donald Trump little more than a week ago, the oil market’s crisis is worsening. The rout will send a deflationary wave through the global economy, complicating the task facing central banks trying to keep economies afloat as the pandemic continues to paralyze business and travel worldwide.

The price collapse could redraw the global map of power as petrostates like Russia and Saudi Arabia, which enjoyed a resurgence over the last 20 years thanks to an oil windfall, see their influence diminished. Exxon Mobil Corp., Royal Dutch Shell Plc and other oil giants are ripping up business plans, desperate to preserve cash.

WTI is the world’s most traded financial oil contract, a benchmark followed from Zurich to New York to Tokyo. But when each month a futures contract nears expiry and traders roll their positions into further-out contracts, the real, physical world of WTI becomes very small — centered on Cushing, an oil town in Oklahoma where a massive hub of pipelines and storage tanks serves as the actual delivery point for barrels.

In the past three weeks, crude has been flowing into Cushing at a breakneck speed, averaging 745,000 barrels a day and taking in more oil than a medium-sized European nation like Belgium consumes. At that rate, the tanks there will be full before the end of May, something that has never happened before.

The days before expiry are often volatile as traders make the shift from a paper to a physical market. Until a few days ago, the May contract had been supported by huge financial flows by retail and institutional investors pouring money into oil through exchange-traded funds.

The largest crude ETF, known as the U.S. Oil Fund, received billions of dollars in fresh funds in recent weeks, accumulating a fifth of all the outstanding contracts in the May futures contract. But last week, it rolled its position into the June contract, and evaporated from May. Without the fund, the contract was abandoned to the the forces of physical supply and demand.