Negative Oil Prices – Economic Implications

Negative Oil Prices – Economic Implications

Home  >>  Daily Economy  >>  Economic Trendscolin-lloydColin Lloyd – May 3, 2020PrintShare:FacebookTwitterLinkedInPinterestEmailShare

Negative Oil Prices – Economic Implications

On Monday 20th April, West Texas Intermediate (WTI) Crude Oil futures for May delivery traded at $-40.32 per 42 gallon barrel (bbl), a decline of 260% in a single day. The impact was sufficient to drag the contract for June delivery down to $6.50/bbl. By the time the May contract expired at $10.01/bbl on Tuesday 21st April, financial, as well as commodity, markets were agog with a mixture of shock and awe. The previous largest single one day price move in WTI futures had been a fall of 35% back in 1991. The chart below shows the price action and volume of contracts traded during the last three months. Even by the standards of the commodity markets this move was quite extraordinary:

Source: Barchart.com

To investors used to owning stocks or bonds the concept of a negative price may seem anathema; after all, the lowest a stock can trade is zero, so why should a commodity be different? The answer is technical. WTI futures contracts are settled by physical delivery at Cushing in Oklahoma. The storage capacity at Cushing is 73mln bbls. The next chart shows how storage demand has varied over the last few years, and 2020 is a clear outlier:


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