Crude oil prices fell below zero on Monday to -$37.63 a barrel for the first time in history. With abundant supply, very little demand, and sellers running out of places to store it, the prices hit a record low during the day.
According to analysts, this is the first time the price on a futures contract for oil has gone negative. It's the lowest level since the New York Mercantile Exchange (NYMEX) opened oil futures trading in 1983.
A negative price suggested that sellers were ready to pay buyers to take deliveries in a bid to avoid incurring storage costs, as oil demand crashed globally amid the coronavirus pandemic. Here's all you need to know about this unprecedented event.
What led to the slump in prices?
The crash in prices can be attributed to the United States Oil ETF and United States Oil Fund (USO). The May futures contract for West Texas Intermediate (WTI), the US benchmark, is about to expire. "This means the USO has to either roll over the contract into the next month or sell it," said T Gnanasekar, Director, Commtrendz Research & Fund Management.
The extreme pressure on the WTI contract for May highlights ongoing concerns about the supply and demand dynamics taking a toll on the oil market.
"The increasing supply and lack of demand has led to the storage tanks getting full. Because of this anomaly, the prices started falling despite the recent OPEC production cut," said Gnanasekar.
The sharp pullback in demand combined with a glut of oil has led to a dearth of oil storage capacity. This has made it hard for traders with contracts for crude delivery in May to find buyers, which sent the contract price into negative territory.
Are oil companies actually paying people to take away their crude?
While some companies may be paying others to take away their crude oil, that does not appear to be widespread.
Many analysts described the dip in crude oil prices as technical, related to the way futures contracts are written. Most buyers are currently purchasing oil that would be delivered in June, not May.
Even so, there were more than 150,000 of those futures contracts that traded hands, enough volume to make it meaningful, said Ryan Fitzmaurice, energy strategist at Rabobank.
“In my view, today’s move was more technical in nature and related to the futures contract expiration,” Fitzmaurice said. “We could see isolated incidents where oil companies pay people to take their oil away as storage and pipeline capacity become scarce but that is unlikely on a sustained basis.”
What led to the sudden fall in demand for oil?
Efforts to limit the spread of the coronavirus have left major cities around the globe on lockdown, air travel has been seriously curtailed, and millions of people are working from home, leading to far fewer commuters on the roads. Hence, there is a slump in demand for fuel.
Why didn't the OPEC deal contain the fall in crude prices?
Earlier this month, OPEC and its allies, with political pressure from the U.S. government, agreed to cut production by nearly 10 million barrels per day — about 10% of current global output. But some analysts feel the deal didn't go far enough to curb massive oversupply. It kept prices from falling further for the time being, but there's still too much oil in the world.
What are the implications for the price of oil in the future?
According to Gnanasekar, "It has a lot to do with the coronavirus pandemic. When a sustainable solution is found, such as a vaccine for the virus, or the US starts reopening all its states, that will ensure the recovery of the crude prices."
What will happen if the lockdown prolongs?
If the lockdown continues for another month or goes beyond that, there will hardly be any demand for oil. In such a case, there is a possibility of even the prices of Brent oil falling from the current $21 to say $10.
Has the price of oil ever gone into negative territory before?
Sometimes, the price on the future delivery of oil will get skewed by a surprise event like an oil pipeline bursting. This can cause the price of a futures contract for a given month to be sharply higher or lower than that for the next month.
Usually, this is smoothed out by the market, but the steep fall in demand combined with oversupply of oil has led to a dearth of oil storage capacity. This made it hard for traders with contracts for crude delivery in May to find buyers, which sent the contract price into negative territory.
“This has never happened before, not even close,” said Tim Bray, senior portfolio manager at GuideStone Capital Management in Dallas. "We’ve never seen a negative price on a futures contract for oil."
(With inputs from AP)