In an extraordinary turn of events, oil futures plummeted below zero for the first time in history, highlighting the devastating economic consequences of the coronavirus pandemic. The sharp decline occurred as traders scrambled to avoid taking physical delivery of crude oil, which overwhelmed storage facilities and exposed the extreme oversupply in the U.S. oil market.
On Monday, the May contracts for West Texas Intermediate (WTI) oil dropped below zero, marking an unprecedented collapse that shattered records set in 1946. This dramatic price plunge occurred just as U.S. industrial and economic activity stalled due to widespread lockdowns. Even a historic output reduction deal brokered by OPEC and its allies failed to offset the severe dip in global demand, which has fallen by as much as one-third since the crisis began.
The situation worsened due to a technical anomaly: traders fled the May contract ahead of its expiration, which fueled a sharp drop in prices. The next month’s contract, set to expire in June, fell 12%, to $22.05 a barrel, creating an alarming $20 spread between the two months.
Michael Tran, managing director of global energy strategy at RBC Capital Markets, warned that the market may continue to spiral downward. “Refiners are rejecting barrels at a historic pace, and with U.S. storage capacity nearing its limit, the market will suffer until either we reach rock bottom or the COVID crisis subsides—whichever comes first,” he said.
Since the beginning of the year, the combination of the pandemic’s economic fallout and a failed OPEC+ deal have sent oil prices into a tailspin. With no signs of recovery in sight and producers continuing to pump at high levels, traders are being forced into a fire-sale of crude. In Texas, some buyers are offering as little as $2 a barrel for certain oil streams, while in Asia, commodity traders face increasing difficulty securing credit as lenders fear the risk of defaults.
In New York, the price of WTI for May delivery fell to an alarming -$1.98 per barrel, the lowest level ever recorded in continuation monthly data since the post-World War II period. Meanwhile, Brent crude, the global benchmark, dropped 6.5%, settling at $26.22.
One of the key storage hubs for U.S. oil, Cushing, Oklahoma, saw crude stockpiles surge by 48% to nearly 55 million barrels since February. This has strained the hub’s storage capacity, which stood at 76 million barrels in late 2019, according to the Energy Information Administration.
Despite the massive drop in prices, retail investors have been pouring money back into oil futures. The U.S. Oil Fund ETF saw a record $552 million in inflows on Friday, with total investments in the fund climbing to $1.6 billion last week. However, experts are warning that these investments may not be enough to stabilize the market.
The collapse in oil prices is sending shockwaves across the energy sector. Crude exploration companies in the U.S. have already shut down 13% of the drilling fleet, and while production cuts are being made, they are not happening fast enough to prevent storage facilities from reaching capacity. Standard Chartered’s Paul Horsnell notes that the pace of production reductions must accelerate to avoid further inventory buildup.
“The market is currently driven by overwhelmingly negative sentiment,” said Michael Lynch, president of Strategic Energy & Economic Research. “The concern is that inventory levels will rise to unsustainable levels, making it very difficult to recover in the short term, and leaving distressed cargoes lingering on the market.”
As the oil industry faces its deepest crisis in decades, the road to recovery remains uncertain, with the continued impact of the pandemic and storage issues likely to shape the market for the foreseeable future.
