US Oil Crashes below $0 for the First Time in History

US Oil Crashes below $0 for the First Time in History

The price for a barrel of West Texas Intermediate crude oil sharply curtailed Monday, falling into negative territory for the first time in history as demand continues to collapse on measures meant to keep individuals at home amid the coronavirus pandemic.

In a stunning development, the value to possess a barrel of U.S. crude delivered in May plummeted to negative $37.63. It was at roughly $60 at the start of the year.

Traders are still paying quite $20 for a barrel of U.S. oil to be delivered in June, which analysts concede to be closer to the “true” price of oil. Crude to be delivered next month, meanwhile, is running up against a stark problem: traders are running out of places to stay it, as factories, automobiles and airplanes sit idled around the world.

Source: Bloomberg

The price for a barrel of oil under the futures contract, which expires Tuesday, fell as low as -$37.63 after opening at $17.73, a dip of more than -290%. That would seem to indicate that there is such a glut of supply relative to demand that suppliers would have to pay to unload their inventory.

The contract is for oil that will be delivered in May, but a contract for June deliveries that will expire May 19 saw a barrel settle around $20. The international benchmark Brent crude also settled around $25.

The May US WTI contract fell $19.06, or 104.3%, to a reduction of 79 cents a barrel at 2:09 p.m (1809 GMT) after touching an rock bottom of -$1.43 a barrel. Brent was down $1.85, or 6.6%, at $26.23 a barrel.

The June WTI contract is trading more actively at a way higher level of $21.6 a barrel. The spread between May and June was quite $23, the widest in history for the 2 nearest monthly contracts.

A man looks at an electronic stock board showing Japan’s Nikkei 225 index, Tuesday, April 21, 2020. Image Source: AP

Investors bailed out of the May contract before expiry afterward Monday due to lack of demand for the particular oil. When a derivative instrument expires, traders must decide whether to require delivery of the oil or roll their positions into another derivative instrument for a later month.

Energy traders fled from the expiring May US oil futures contract in a frenzy, sending the contract deep into negative territory for the first time in history, as barely any buyers are willing to require delivery of oil barrels because there’s no place to place the crude.

Plunging crude prices pulled global equity markets lower and investors moved to the security folks Treasury securities, pushing yields slightly lower as any risk of near-term inflation about evaporated with the price of spot oil cheaper than free.

A man wearing a mask against the spread of the new coronavirus looks at an electronic stock board showing world stock indexes at a securities firm in Tokyo Tuesday, April 21, 2020. Image Source: AP

In addition to global efforts that have kept people from leaving their homes, a since-ended feud between Saudi Arabi-led OPEC and Russia flooded international oil markets with excessive supply as producers have drawn down supply.

More recently, countries around the world have tentatively eased up on business-shutdown restrictions meant to slow the spread of the virus. But health experts warn the pandemic is way from over and new flareups could ignite if governments allow a premature rush to ”normal” life. Many analysts also warn that a number of the recent rally for stocks is predicated on overly optimistic expectations for a fast-economic rebound once shutdowns end.

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