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How Negative Oil Prices Happened and What They Mean for You



Negative Oil Prices Explained in One Minute: From Demand Shock to Futures Market “Fine Print”

Oil is one of the most important commodities in the world, but its price can be very volatile. In April 2020, something unprecedented happened: the price of US oil turned negative for the first time in history1. How did this happen and what does it mean?

Demand shock

The main reason for the negative oil prices was the collapse in demand caused by the COVID-19 pandemic. As lockdowns across the world kept people inside, the need for oil plummeted. Airlines grounded their flights, factories halted their production, and cars stayed parked. The International Energy Agency estimated that global oil demand fell by 29 million barrels per day in April 2020, a 30% drop from the previous year2.

Supply glut

At the same time, the supply of oil remained high, creating a huge surplus. In March 2020, Saudi Arabia and Russia engaged in a price war after failing to agree on production cuts. They both ramped up their output, flooding the market with cheap oil. The Organization of the Petroleum Exporting Countries (OPEC) and its allies eventually reached a deal to slash output by 10 million barrels per day in April 2020, but it was too little, too late1.

Storage crisis

The mismatch between supply and demand led to a storage crisis. There was simply not enough space to store all the excess oil. Oil producers resorted to renting tankers, trains, and trucks to store their oil, but these options were costly and limited. The most important storage hub in the US, Cushing in Oklahoma, was nearing its capacity of 76 million barrels1.

Futures market

The final factor that drove oil prices below zero was the futures market. Oil is traded on contracts that specify the price and date of delivery. The most widely used contract is the West Texas Intermediate (WTI) for US oil, which expires on a monthly basis. On April 20, 2020, the May contract was due to expire the next day. Traders who held the contract had to either sell it or take delivery of the oil. However, because of the storage crisis, no one wanted to take delivery. Traders were willing to pay buyers to take the oil off their hands, resulting in negative prices. The May contract closed at minus $37.63 a barrel, meaning that sellers had to pay buyers $37.63 for each barrel of oil they delivered1.

What does it mean?

Negative oil prices were a short-lived phenomenon that reflected the extreme conditions of the oil market in April 2020. They did not mean that consumers could get paid to fill up their gas tanks or that oil producers would pay them to take their oil. They only affected the futures market, not the spot market, where oil is sold for immediate delivery. The spot price of WTI remained positive, though very low, at around $10 a barrel1. Negative oil prices also did not affect the global benchmark for oil, Brent crude, which is based on oil from the North Sea. Brent crude traded at around $25 a barrel on April 20, 20201.

Since then, oil prices have recovered as demand has picked up and supply has been curtailed. As of April 2021, WTI is trading at around $63 a barrel and Brent crude at around $66 a barrel3. However, the oil market remains uncertain and volatile, as the pandemic continues to pose challenges and opportunities for the industry.

1: US oil prices turn negative as demand dries up - BBC News 2: Oil prices went negative a year ago. Now the glut is gone | CNN Business 3: [Oil - BBC News]

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