Know the Concept – How can crude oil prices be negative ?

Oil Prices are trading at virtually $0 (Zero Dollar) and this price was hardly a surprise after coronavirus lockdowns hit demand. The historical Oil price of lifetime was seen at WTI market when futures contract for US benchmark West Texas Intermediate WTI closed Monday in New York at -$37.63. One barrel is approx 159 litre.

It means crude oil producers were willing to pay someone to take the product off their hands. Prices fell so much that some traders paid buyers to take oil off their hands. 

How could this happen?

Technically, it happens when the contract expires and the owner of the contract is technically supposed to take delivery of the crude. And that is the problem: The oil storage terminal in Cushing, Oklahoma where WTI is delivered is nearly full given the ample US production and refineries slowing their output as gasoline demand drops and pipeline capacity to get it out is limited.

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It is well known that the oil price reflects the economic value of oil less than the cost of storing oil. As WTI requires physical delivery and storage is very expensive to access, the cost of storage in May exceeded the economic value of oil in May. Thus traders were ready to pay others to take it off their hands.

Those who speculate on oil futures and never want to hold it had to get out of the WTI May contract before it expires, adding to the downward pressure.