For the first time, oil futures plunged to below zero, as the worsening economic uncertainty triggered by the coronavirus crisis left traders scrambling to prevent physical crude delivery.
The price for the May contracts wiped out all interest on an unparalleled day of trading, shattering any low for oil prices since 1946. The exchange where WTI futures trade said it would allow the contract to price below zero.
The drastic change revealed how over-supplied the U.S. oil market has developed to a halt with industrial and economic activity as governments across the globe are expanding shutdowns due to the rapid spread of coronavirus. An unprecedented production agreement to curb supply by OPEC and its allies a week ago is proving too little too late in the face of a one-third fall in global demand.
On Monday, a technical oddity aggravated the price drop as traders fled the May futures contract ahead of its expiration tomorrow. The following month’s contract fell 12% to $22.05 a barrel, making the spread between the two months blow out more than $20.
Managing director of global energy strategy at RBC Capital Markets Michael Tran said, “There is little to prevent the physical market from the further acute downside path over the near term. Refiners are rejecting barrels at a historic pace and with U.S. storage levels sprinting to the brim, market forces will inflict further pain until either we hit rock bottom, or COVID clears, whichever comes first, but it looks like the former.”
Oil prices have plummeted since the beginning of the year following the compounding impacts of coronavirus and a breakdown in the initial OPEC+ deal. With no end in sight and producers worldwide continuing to pump, that’s causing a fire-sale among traders who have no access to storage.
Signs of weakness are everywhere. Buyers in Texas are paying as little as $2 a barrel for some oil sources, which increases the risk that producers may soon have to pay to get their hands taken off crude. Bankers in Asia are increasingly reluctant to give commodity traders the credit to survive as borrowers become increasingly fearful of the possibility of a catastrophic default.
In New York, West Texas Intermediate fell as low as -$1.98 a barrel for May delivery. According to data from the Federal Reserve Bank of St. Louis, it is the lowest in continuation monthly data charts since 1946, right after World War II. Brent was down 6.5% to $26.22.