Oil Price Crash…One Day Wonder
Just when you thought you’d seen it all, an amazing day in the oil markets saw the price of US oil fall below zero to a price of minus US$37/bI, in other words you couldn’t even give oil way, you had to pay someone to take it from you. How did this happen? The answer is both fundamental and technical
Firstly, a bit of background, there are two major benchmark oil prices Brent and WTI
- Brent is extracted from the North Sea and used to price oil from Europe and the Middle East
- WTI, or West Texas Intermediate, is used to price US oil, predominantly from Texas, Louisiana and North Dakota
- The price of both is usually close, any differential being storage and transportation cost with Brent typically a dollar or so pricier.
- The price of oil has collapsed from over US$60/bl to around US$25/bl this year as demand has totally collapsed whilst a price war between OPEC and Russia flooded the market with oil from February. This was only partly resolved by production cuts in a deal brokered between OPEC and non-OPEC on Easter Sunday but there is still way too much oil around
So, what happened yesterday?
Crucially, oil is dealt in what is called a ‘futures’ market with prices set to a ‘future’ monthly date on which day delivery will be made. When a monthly contract expires traders decide whether to take delivery or ‘roll’ the contract forward into the next month. Yesterday traders fled the WTI May contract (expiring today) forcing a negative ‘roll’ price because as US storage facilities are nearly full there was simply nowhere to put the crude oil they would be forced to take on the expiration of the contract.
This explains the dramatic fall in the WTI oil price and also the differential between WTI and Brent, whose price fell to only US$25/bl. Brent May futures expire on April 30th, can be settled in cash, and as the oil is pumped offshore it can be stored in tankers. Much of WTI is pumped onshore and stored at a huge landlocked facility in Cushing Oklahoma.
So, while yesterday’s negative oil price made huge headlines it was in actuality a technical ‘one-day’ event due to the expiration of a futures contract. While the expiring May contract was trading at minus US$37$/bl, the June contract was trading at US$21/bl and July at US$27/bl, in line with Brent and implying that oil prices will stay low in coming months, but not at negative levels. So please don’t rush to your garage expecting to be given fifty quid when you fill up.