On Monday, the contract for West Texas Intermediate crude CLc1, or WTI, dipped below zero for the first time since the contract inception in 1983. At one point, the benchmark contract for US oil touched negative $40/barrel, before a slight rebound ahead of the close of trading. This collapse reflects a global energy glut as the coronavirus destroys demand while producers pumped more supply into the market.
The worldwide demand for oil stood at 100 million bpd, but the coronavirus has slashed about 30 million bpd or 30% of the global oil consumption since early March. However, it takes OPEC and other oil-producing nations until early April to agree on about 20 million bpd supply cuts. The cuts are expected to take months before matching with reduced demand. With the current consumption level, it would take even longer to dry up the unwanted supply.
The unneeded crude oil is then going into storage. As a result, crude storage is closing to full capacity. EIA last week reported that storage at Cushing, Oklahoma, was about 72% of capacity by April 10, and traders speculated that it would fill to the brim within two weeks. Now that storage capacity is unavailable, the oil price is effectively worthless, according to Bob Yawger, director of futures at New York Mizuho.
A futures contract is for a thousand barrels of crude oil which is delivered to storage tanks in Cushing with a capacity of about 76 million barrels. The May contract will expire on Tuesday and investors holding this month contracts did not want to incur high storage costs. Hence they have to pay buyers willing to take oil off their hands.
Oil prices outside the US are still trading above zero. The international benchmark Brent, for instance, traded at above $20/barrel on Monday, but that was its lowest point in 18 years, and Brent has lost two-thirds of its value since January. The June WTI contract is also trading at above $20/barrel. However, with the current supply and demand balance, analysts expect negative oil prices to recur in the coming months.
