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Crude oil prices dropped into negative territory for the first time in history Monday, as financial fireworks collided with evaporating demand and scarce storage. The decline below zero means that sellers are effectively paying buyers to take the oil off their hands.
By late Monday afternoon New York time, the front month WTI contract was sitting at minus $38.45/barrel, down an eye-watering 310.45% on the day.
“It’s like trying to explain something that is unprecedented and seemingly unreal,” said Louise Dickson, an oil analyst at Oslo based Rystad Energy.
That descent into negative territory marks a remarkable, apparently unstoppable, decline over the course of the day. However, while analysts warn the market is weak, the sheer scale of the decline is largely a reflection of a technical clash—rather than real-world trading.
The price currently reflects the May contract, which will expire on Tuesday, rather than the June contract—which is currently seeing the bulk of the trading, and is therefore far more reflective of the WTI price as a whole.
The May contract, therefore, is hugely illiquid—and whoever is left holding the contracts when it closes could be forced to take delivery of barrels of oil that no one, it is safe to say, currently wants. (Think of it like a very expensive game of musical chairs.)
“What’s very apparent is someone lost their shirt,” said Bjarne Schieldrop, chief commodities analyst at SEB in Oslo. A drop to negative $40/barrel is “pure financial action”, rather than a reflection of the true market, he said.
The June WTI contract on Monday, for example, settled at $20.43/barrel—similar to prices seen last week. The gap between May and June, which was at points at least $60/barrel, was the largest gap between two back-to-back month contracts ever seen, Bloomberg reported—reflecting that the market is dramatically weaker in the near term than it’s expected to be later on in the year.
It also represents a huge divergence from the Brent crude contract, for example, which only weakened 7.55% on the day, sitting at $25.96/barrel shortly before the close.
However, the global oil market is undoubtedly weak—driven by the utter demand collapse due to worldwide lockdowns as a result of COVID-19, which has produced a market so oversupplied it has triggered a price collapse it appears even production cuts by OPEC+ have so far been powerless to halt.
That oversupply is so extreme, in fact, it has triggered a storage crisis—creating a backlog that has made storage space more valuable than the oil itself. That is already causing “shut ins”, industry jargon for halting drilling and refining, because there is nowhere for the oil to go.
In the physical world of oil trading, this makes negative prices highly likely—until production halts totally, just to make space for more oil, many producers could forced to pay for someone else to take it off their hands. Last week, Bloomberg reported that some sellers in Texas were already selling off crude for as little as $2/barrel.
Analysts have been warning for weeks that quickly disappearing spare storage capacity would mean that drilling and refining of oil in many regions would have to be stopped. Rystad Energy said on Monday that the hardest-hit regions were Alberta, Venezuela, and Iraq, and that shut ins had already resulted in an estimated 1.9 million barrels/day being taken offline so far in April. Storage in the U.S. is also under pressure—space in the Cushing facility in Texas was also rapidly disappearing, according to the U.S. Energy Information Administration.
There is likely more volatility to come, warned Schieldrop—and it will likely come from the two most common news making sources on oil markets: OPEC, and U.S. President Donald Trump.
“If OPEC doesn’t say anything now, or Donald Trump doesn’t say anything now, who would say anything?” Schieldrop said. “This is just overboard!”
But while a tweet or an OPEC statement have made prices jump before, the question now is whether the oil markets are even listening.
More must-read energy sector coverage from Fortune:
—Why the coronavirus crisis could make Big Oil greener
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—IEA warns of “staggering” demand drop in global oil markets
—Crude math: Why $10 oil could be worth less than nothing—Listen to Leadership Next, a Fortune podcast examining the evolving role of CEO
—WATCH: PSEG CEO on climate change action: “It should have been done yesterday”
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