The Day Oil Went Negative
The move was certainly historic during the bear market for oil.
On April 20, 2020, oil did something out of the blue that left experienced economists and traders scratching their heads. The New York Mercantile Exchange’s May contract for West Texas Intermediate (WTI) crude went down by 306% or $55.90 for the day, to close at -$37.63 a barrel. This was the first and only time a contract has closed in the negative. If oil prices are negative, someone who has a long position in it would have to pay someone to buy it from them.
🌍 The Aftermath
If someone were to accept the delivery of crude at the end of the May oil contract, there wouldn’t be anywhere to store it due to surplus. It would also indicate lower gas costs at the pump, which will be advantageous for hard-hit customers. The action was unmistakably a sign of an unprecedented oil bear market that has been brought on because of the global pandemic. A fall in demand and a short-lived but vicious pricing war between Saudi Arabia and Russia pumped even more petroleum into an already oversupplied market.
However, this also brings up the fact that futures contract prices fluctuate wildly as the contract nears the expiry. Producers hoped that the low prices would not persist long and that OPEC would not be able to quickly agree on a course of action. Oil storage was swiftly filling up and at the same time, oil-laden ships turned into floating storage in the middle of the sea. Nobody wanted to purchase when they wanted to sell.
📗 Lesson Well Learnt
As pandemics typically occur only once every generation or less, the markets were not experienced and prepared for what was coming. A pandemic might strike again and the next time it does, oil producers, OPEC and the governments now have the experience to deal with it.