Oil Futures Prices: Making Sense of Oil’s Negative Price

What happened with oil futures prices Monday? The front month May West Texas Intermediate (WTI) contract (which is set to expire Tuesday) was sold down below zero and at its lowest point was off appx. 299% at -$37.63/barrel before settling slightly higher. That is not a misprint! Front month prices closed negative on the day meaning holders of said contract going into Monday’s open were willing to pay another party to take the contract off their hands.

Why did this happen? The short answer is stay-at-home orders around the world are directly impacting demand for crude oil. Estimates for exactly how much demand has eroded range from 15M-25M barrels per day, which translates to appx. 15-25% of daily global oil consumption. The question then becomes where do you store the excess supply? Cushion, Oklahoma is the primary storage hub in the United States and currently sits at appx. 65% of capacity and some estimates have it “topping the tanks” in the next 2-3 weeks. Point being if you’re a holder of a contract that obligated you to take delivery of X amount of crude oil in May and you no longer have a place to store it you simply hit the sell button; hence prices on the May contract collapsing Monday. More information on Cushing storage.

ETFs that track WTI contracts did not help! It is possible they exacerbated the decline. USO, GUSH, DRIP, ERY, etc. Many of these are levered ETFs that track the daily movement by 2x or 3x and simply added fuel to the fire. See link to article in Forbes article for more information – “The U.S. Oil ETF, USO, Is The Culprit Behind Oil’s Massive Plunge”.

Of note, the WTI oil futures strip for summer prices held up relatively well Monday with June, July and August all settling in the $22-$29/barrel range. That said, with June set to become the front month contract Wednesday it’s already seeing some selling pressure Tuesday morning.  View the WTI strip on oil futures prices.

Is there an end in sight? Very simply, the market cares about one thing right now and that’s getting cars back on the road, planes back in the air, boats back on the water, etc. While supply is falling (down 700K Barrels Per Day in the U.S. in the last two weeks and rig count down nearly 200 in same period, not to mention OPEC+ finally coming to their senses) the market needs to see a bottoming to the demand destruction. When this happens is anyone’s guess but assuming other states begin to follow the likes of Texas, Georgia and others that have recently announced plans on opening their economies back up then that time is hopefully sooner rather than later.

While difficult to see through the current malaise, one needs to remind themselves that oil futures prices in the $20s and $30s were not sustainable as the global oil industry simply cannot reinvest enough capital at those prices to meet the needs of a global economy that on January 1, 2020 was consuming 100M BPD. What that means for future supply/demand disruption is that there will eventually be a deficit to demand. When this happens and how prices respond is TBD.

Please feel free to reach out to your 25 advisor to discuss further. One key item we look for during our due diligence in a commodity based partnership is debt. We are pleased to have access to multiple oil industry companies.