What’s Going on with Oil?

Monday, April 20th marked a historic day for oil and gas – for the first time in history, the price per barrel (BBL) fell below $0. Since the US is the largest producer of oil in the world, this could appear devastating to GDP, oil and gas jobs, and the overall economy. However, the simple price per barrel does not tell the whole story.

When the price of West Texas Intermediate (WTI) crude was quoted as negative, the price referred to the May futures contract. Futures trading helps to predict the price of a commodity and to steady cash flow for the producer, but the owner of the contract is still obligated to take possession of the product when the contract expires. With prices already sitting at remarkably low figures over the past few weeks, many of the large consumers have maxed out their storage facilities (primarily in Cushing, Oklahoma). Moreover, with consumer-demand being lower than usual, the supply is not diminishing at its normal rate.

Since yesterday was the final day before the expiration of May contracts, many traders did not have the capacity to store new barrels of oil and were desperate to off-load their contracts. Thus, futures traders had to pay a third party to take possession of expiring contracts and the barrels of oil, creating a negative price for crude oil.

Although the decline in oil price is concerning, negative prices are not expected to become a trend. For the June contracts, the price of WTI crude has fallen by approximately 20% but still remains at around $15 per barrel as of this morning (April 21st).