Oil Plummets Over 300% To Almost -$40 A Barrel In Historic Collapse

In a historic collapse, U.S. oil prices plummeted over 300% on Monday as traders unloaded their positions ahead of the May contract expiration Tuesday. Of all the unpredictable economic swings in financial markets that have occurred since the onset of the global pandemic, Monday’s oil wipeout is without a doubt the most jaw-dropping.

At its lowest, the price for West Texas Intermediate (WTI) crude fell to an unbelievable – $37.63 a barrel, validating concerns that there is truly no floor to how low oil prices can go amid the Covid-driven demand collapse. Some analysts, including this author, predicated the possibly of negative oil prices for several days and weeks.

How do prices go negative?

A combination of the COVID crisis, a global supply glut, domestic oil storage shortages, an inadequate OPEC deal, and speculators looking to sell off their May contracts created the perfect storm for WTI. The global oil benchmark Brent crude, which closed the day down 8% at $25.95 per barrel, does not share WTI’s vulnerability to storage issues and was thus spared from total disaster. This is because Brent-denominated oil can easily be put on ships and sent to areas with higher demand, while the storage tanks in Cushing, Oklahoma, and in Texas and Louisiana, will be filled by May. This is the most serious decoupling of WTI and Brent benchmarks in history.

And herein lies the problem for WTI. Oil traders and speculators rarely have the physical capacity to hold the crude they buy, despite being legally bound to take it by their contract. Under normal circumstances, these contracts (typically 10,000 barrels in size) can be sold to other speculators, or wound down over time. But in this instance, there was no one willing to buy May’s expiring contact, so speculators were left scrambling looking for buyers. Failure to physically take the purchased deliveries would result in exorbitant storage fees from the seller, so the investors holding these contracts were desperate. The only buyers left to take this land-locked crude are domestic storage companies who are already inundated with supply. These buyers hold all the negotiating power, waiting to take contracts for pennies on the dollar – or in some cases taking payment from sellers of offload the commodity.

What’s next?

“The May crude oil contract is going out not with a whimper, but a primal scream,” said Daniel Yergin, the Pulitzer Prize-winning oil historian and vice chairman of IHS Markit Ltd. Analysts almost universally agree that this situation is a horror show and it’s looking more and more like the market has no bottom. Despite the 20 million barrel per day cuts to oil, agreed on by April 12 by the OPEC+ negotiators, it is clear that global demand has plunged far beyond what that cut could offset. As we said in this space, this was “too little too late”.

The June contract was trading lower by 18% at $20.43 a barrel, but there’s a good chance that drops further over the course of the week, as investors take stock of today’s US oil market wipeout. The Dow Jones did not respond positively to today’s events either, closing down a whopping 600 points.

The oil market has taken its hardest hit in decades in the first four months of 2020. Monday’s news is the culmination of the worst health crisis since the Spanish flu, months of unsuccessful talks between OPEC+ members, an ultimately unsuccessful interventions by the White House to stabilize the market – and the economic collapse of the Great Depression proportions,.

With Assistance from David Pasmanik and James Grant