- For the first time, near-term contracts for US crude oil traded negative on Monday, settling at about minus $38 a barrel.
- The coronavirus pandemic has cratered demand for fuels like gasoline, dragging demand for oil down with it. Storage tanks around the world are quickly filling up as a result.
- With nowhere for oil to go, the price is tanking into the red. That means traders and even producers may actually pay people to take their oil.
- Visit Markets Insider to view the latest on oil prices.
For the first time, the price of near-term contracts for US crude oil traded negative on Monday, collapsing to lows close to negative $38 a barrel. On Tuesday morning, US crude was up but still trading in the negative double-digits.
Energy analysts have been suggesting that oil prices could go negative since they first crashed in early March, with the coronavirus pandemic cratering demand for fuel, as Business Insider previously reported.
“I think we might see that happening going forward,” Per Magnus Nysveen, the head of analysis at the research firm Rystad Energy, said of negative prices on March 27.
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But they didn’t expect that the US benchmark, West Texas Intermediate, would reach into the red — or at least not on this scale.
“It’s like trying to explain something that is unprecedented and seemingly unreal!” Louise Dickson, an analyst at Rystad, said in a statement following the meltdown on Monday.
Coronavirus has gutted global oil demand
The coronavirus pandemic has cratered demand for fuels like gasoline as cities across the globe issue stay-at-home orders, and oil demand has fallen in turn.
In April, global demand for oil is expected to be down by as much as 29 million barrels a day, or by about 30%, relative to last year, according to the International Energy Agency.
To counterbalance that collapse and stabilize the market, more than a dozen top-producing nations agreed to pare back supply on the scale of 10 million to 15 million barrels a day — or by as much as 15% — beginning in May.
Yet even that historic agreement wasn’t enough to stop prices from plunging negative.
Read more:Why the price of oil is continuing to free-fall after a historic supply cut — and when experts think it may finally reach rock bottom
On Monday, the futures contracts for US crude to be delivered in May tumbled, reaching unprecedented lows nearing negative $38, failing to rebound into positive territory at market open on Tuesday.
When the price of oil goes negative, it means it’s less than worthless. In fact, some traders and even producers might actually pay people to take oil from them, Nysveen said.
Here’s how that would work.
How oil prices go negative
Once oil is pumped out of the ground, it has to be stored and transported, which costs money.
And those costs can be higher in regions like the central US — relative to, say, Saudi Arabia — that are farther away from global markets, David Doherty, an oil analyst at the research firm BloombergNEF, said.
When the price of oil crashes, producers may lose money on the sale of oil, simply because they can’t recoup production costs. But in extreme cases like this, oil is also hard for them to sell at all.
With demand waning, oil reserves are starting to fill up — especially those in Cushing, Oklahoma, where West Texas Intermediate is delivered.
“Traders have been gobbling up cheap oil and pumping storage full, and now, in the case of WTI and Cushing, storage has reached a physical limit,” Dickson said, noting that Rystad estimated that there were only 21 million barrels of free storage remaining.
At the same time when there is nowhere to put WTI oil, few people want to buy it. And that can turn prices negative, Nysveen said.
In this case, some market dynamics sent the price deep into the red.
Usually, when people refer to the price of oil they’re talking about futures contracts — meaning, the price of oil that will be delivered at a later date.
The price that went negative Monday was for futures contracts to be delivered in May. Those contracts expire Tuesday. So on Monday, traders, who don’t take physical deliveries, were rushing to sell them to buyers who do.
But with storage at near full capacity and little demand, there weren’t exactly buyers lining up for oil. The traders instead will pay those buyers to take the oil — in this case, as much as $38 a barrel.
Producers could pay people to take their oil
The price of US crude to be delivered in June and July was still well into positive territory on Monday.
But if the price of oil stayed negative, it would be cheaper for many producers to give oil away — or pay people to take it off their hands — than it would be to store it themselves.
“They will not be able to sell their oil because no one will take it,” Nysveen said, referring to the case in which the price of oil continues to deteriorate. “Then they actually have to pay someone to take that oil.”
You might be wondering: Why don’t producers just shut down the well until prices go back up?
Nysveen said it’s not that easy. In some cases, turning off the tap can “destroy” the resources, he said.
“It’s not always possible to turn down oil production,” he said.
What negative prices mean for companies and consumers
Cheap oil means cheap gasoline. On Monday, the average cost of gasoline in the US was just $1.80, according to AAA.
But just because May futures are worthless doesn’t mean gas will be, too. June and July contracts — selling for about $14 and $22 a barrel — are a better indicator of longer-term prices.
Nonetheless, the extraordinary prices Monday spell bad news for US oil and gas companies, which require prices closer to $40 a barrel to turn a profit.
“Now that we have reached this threshold, the next logical step will be shut-ins and bankruptcies,” Dickson said.
Read more:How 18 oil giants from Exxon to Halliburton are cutting staff and slashing spending in response to the historic oil price meltdown
One large exploration and production company — Whiting Petroleum — has already filed for bankruptcy. And Rystad estimates that even in $20-a-barrel territory the number of Chapter 11 cases could reach 140 this year and increase to nearly 400 in 2021.