Oil prices fell off a cliff to new lows Monday afternoon after the price for a barrel of West Texas Intermediate (WTI) crude, the benchmark used for pricing, fell to negative $36.20 a barrel—yes, you read that right.
The coronavirus has severely reduced oil demand around the world due to large declines in airline, car, shipping, and trucking traffic as well as manufacturing production.
When oil prices are negative, it means traders holding oil futures are paying buyers to take it off their hands or risk having to take physical delivery of the oil, which most are incapable of doing. Oil is still a valuable commodity, but the selloff followed a huge oversupply in the market after major producers refused to lower their output creating fewer places to store the liquid.
Oil is sold through futures contracts, which means there is a gap between the contracted price and the spot price paid at its actual delivery date. The contracts for May were set for Tuesday, April 21 and that pricing gap grew as more traders anticipated demand would not return until at least the fall, resulting in a historic sellout. Monday’s price was the lowest at least since records started being kept by BP in 1861.
The current pricing situation, known as in the industry as contango, means oil is expected to be much more valuable in the future, when demand is set to rise again, rather than its spot price right now. If buyers are able to find a place to store the oil, there’s the possibility of huge gains. However, that arbitrage strategy is dependent on locating a storage facility and managing that expense, as well as actual major changes in global demand.
WTI was not the only commodity to enter negative territory on Monday. The price of Canadian Western Select, a type of oil that often trades at a discount to WTI due to its additional transportation and refinery costs, was also pushed to below zero. This forces several Canadian oil companies to also essentially pay to get rid of their product.