US oil price crashes below zero for first time in history

US crude oil futures turned negative on 20 April for the first time in history, with the May US West Texas Intermediate (WTI) front-month crude futures price settling at –$37.63/b as falling demand due to the coronavirus pandemic has created a global supply surplus and storage space is rapidly reaching capacity.

Commenting on the news, Oil Markets Analyst at Rystad Energy, Louise Dickson. comments: ‘The most simple explanation for negative oil prices is that midstream players are now paying “buyers” to take oil volumes away as the physical storage limit will be reached. And they are paying top dollar.And what does that mean? That pricey shut-ins or even bankruptcies could now be cheaper for some operators, instead of paying tens of dollars to get rid of what they produce. Traders have been gobbling up cheap oil and pumping storage full, and now, in the case of WTI and Cushing, storage has reached a physical limit....For months, Rystad and many other agencies have been warning about running out of storage in mid-May – this isn’t news to anyone trading oil. Traders that do not have access to storage can no longer accept volume deliveries as the May contract expires. And those traders that do have access to storage are happy to short the market.’

Callum Macpherson, Investec’s Head of Commodities, adds: ‘The fact that a US benchmark crude [WTI] traded well below zero on its last day of trading day before expiry, could be dismissed as a technical effect, as remaining holders desperately try to get out of a position that could lead to them receiving oil in May in a storage location that might then be full. June US crude futures remained over $20/b yesterday and Brent over $25/b…. The advent of negative prices on a benchmark future will send a very strong signal to OPEC+ and G20 producers of the dangers facing the industry. This may be a foretaste of what is to come if they do not take more coordinated action to manage the situation.

Commenting on the potential impact on Asian markets, Wood Mackenzie’s Research Director Sushant Gupta says: ‘The historic drop in WTI prices is an indication of the downward pressure which many other crude oil grades could face, given the oversupply situation. It also provides an opportunity for large consuming nations in Asia such as China and India to expedite filling up their petroleum reserves. The capacity left this time around is much less compared to the 2014/2015 crash. Nevertheless, the current prices are very attractive to fill whatever is left. India has about 12–13mn barrels of spare capacity out of 39mn barrels of SPR [strategic petroleum reserve] capacity in the country.’

Meanwhile, Oil and Gas UK (OGUK) warns the latest oil price developments could fundamentally undermine the ability of the UK’s oil and gas industry to recover and serve the energy transition. OGUK Chief Executive Deirdre Michie says: ‘While we have anticipated continued pressures on oil markets, there’s no getting away from the fact that this situation is a body blow for an industry already creaking under the strains of the impact of COVID-19 and sustained low commodity prices. The dynamics of this US market are different from those directly driving UK produced Brent [which was trading at just over $25/b as the WTI price plummeted] but we will not escape the impact. Ours is not just a trading market; every penny lost spells more uncertainty over jobs, our contribution to public services and to the transition we all want to see. OGUK will be pressing the case for a COVID-19 resilience package to governments in the coming days which will focus on protecting the supply chain, jobs and our ability to continue to reposition ourselves for the future.’