West Texas Intermediate has set an all-time record low for crude oil prices. What exactly happened?
On Monday, the world experienced something like never before: the price of a barrel of oil in the United States fell negative. And it kept plummeting.
The US’s main marker crude, West Texas Intermediate, eventually settled for -$37.63 a barrel. Essentially, WTI May-dated future contracts were to be settled by 21 April- meaning that its buyers had to decide what to do with the contracts by then. The desirable choice would be to sell them at a higher price or cash-and-carry it – both of which would earn the trader a substantial profit. But there was a wrench in the gears. The coronavirus, which has taken the world by storm, has caused a near-economic standstill in most places. This resulted in a dramatic fall in demand for crude oil in America, which meant that if they decided to sell the contracts at the desired price nearly nobody would purchase them. And if the contract buyers stored the oil they would almost certainly go bankrupt- as storage has become very expensive due to the glut of oil.
To tackle this problem, traders have decided to pay for someone to take a barrel of oil off of their hands. Unlike crude oil, other oil types have not fallen so quickly, though, as the deadlines for those are further away.
Why were the prices already low? In a recent meeting, the G20 countries decided on a whopping cut of 9.7 million barrels per day by the OPEC+ alliance. OPEC (The Organization of the Petroleum Exporting Countries) is an intergovernmental cartel formed to regulate global oil production so they can control prices. If an OPEC member or any other oil-producing country does not follow such agreements, things can go off the rails very quickly. In this case, the US government refused to regulate production, and sell off the oil at cheap prices. Then, when the economic situation got even worse, the excess production resulted in a situation of too much production and too little consumption and storage.
This was a historic moment, but experts do not expect the price to stay negative for more than a couple of weeks. Eventually, as low prices are putting pressure on large oil-producing countries (such as Saudi Arabia and Iran), they will need to slow the pumping of oil or else they will run out of storage. This will slowly help lift the oil prices- but the predicted slow reopening of the economy means that crude oil prices are likely to stay very low for a long time. They may never even be the same again.
This also does not mean free oil, or free money. You’d have to travel all the way to Oklahoma, because this specific contract is for a large storage hub in Cushing. Plus, each contract is for 1,000 barrels of oil. Not exactly something you can store in your front yard.