The price for West Texas Intermediate (“WTI”) crude oil, the U.S. benchmark, crashed WAY below $0 earlier this week.
Some of this is market mechanics… The May futures contract for WTI crude expires on Tuesday. That means traders holding onto contracts the following day would have to take physical delivery of the crude oil, so if this were to ever happen, today would be the day. If you look further out in the curve, into the coming months, oil prices are much higher. The contracts for June, July, and August are all trading in the low to high $20s.
The May delivery futures contract is down nearly 300% to around negative-$40 per barrel. The previous all-time low record for such a contract was positive-$10.42 per barrel, set in 1983.
Looking at the bigger picture, the plunge speaks to just how out of whack oil supply and demand (and storage) are today… Nobody wants oil.
U.S. capacity is quickly filling up and there is a fleet of Saudi tankers with seven times worth the typical monthly amount of oil about to hit the U.S. Gulf Coast. This will further compound the problem with little to no storage space available. If storage space disappears, this could force U.S. drillers to further halt production efforts.
The June contract sold off sharply as well but held above $20/bbl.
The recently agreed-upon supply cuts by OPEC+ are for May and June. As a result, the Saudis are said to have continued to pump huge amounts of oil in the meantime.
There isn’t much to add about the move in crude oil. We can’t find another occurrence of the front-month future of a major commodity contract trading in negative territory. It might have happened at some point, but we can’t find it. It’s at least worth pointing out the folly of “this won’t end well” kinds of comments related to the surge of shares in funds like USO, assuming that mom-and-pop are rushing into the oil fund.
Monday’s plunge below zero in the crude oil market, while remarkable and historic, is not the energy industry’s only problem or even its most serious one. It will inspire more government control over the economy and ultimately reduce economic growth.
- When storing oil is a better business than producing it, logic suggests either reduced production or more storage. But logic isn’t in control here.
- Such episodes often bring down a “whale” investor. This is possible but remains to be seen.
- Risk managers will tighten controls to cover scenarios once thought impossible. This will affect the market’s “animal spirits.”
- We could also see large players take advantage of the chance to buy smaller companies, thereby reducing competition.
- This will create the appearance, and maybe the reality, that markets are nothing but “gross orgies of speculation.”
- More government appearance is the likely outcome, leading to even slower growth.
A continuing theme in the coronavirus era is how it exposes problems that were already there. This negative oil incident does the same: complacency about risk and industry consolidation. Unlike viruses, these are not natural phenomena. But they will have natural consequences.
