With a significant decrease in global oil demand, the price of its futures contracts dropped into negative territory for the first time in history on Monday.
May futures for WTI crude oil went to minus, meaning sellers are effectively paying buyers to take the oil off their hands. The economic downturn caused by the coronavirus pandemic has led markets with surplass of crude oil. Due to quickly disappearing spare storage capacity in American fuel depots, there is no room for oil storage. As a result, no one is willing to purchase oil contracts with an expiration date.
The transition to the negative territory due to technical clash on Monday does not reflect the actual state of the weakened oil market. The cost of May futures, which expires on Tuesday, significantly diverted from the cost of June futures. A difference of $20 is a historic maximum. June futures fell 12 percent to $22.05 a barrel on Monday.
The cost of May futures has become even lower than the minimum since 1946. The WTI has shown the possibility of an oil contract to be traded at a negative territory. This shows how overwhelmed the U.S. oil market is. Experts said the agreement reached a week ago by the OPEC + countries on an unprecedented reduction in oil production, after the fall in global oil demand by one third, is too late a decision.
Buyers for the May futures are often the refineries and airlines that require physical delivery of products. But because of their full storages, these enterprises do not require oil.
After the May WTI futures fell to minus $40.32 on the New York Stock Exchange, they settled at minus $37.63 per barrel. This, taking into account monthly recorded indicators since 1946, is the lowest price in history. Brent crude, which has entered into its June contract and is an international benchmark, has fallen 8.9 percent to $25.57 per barrel.
Oil is not a stock, but a raw material. Futures contracts have a delivery time. May futures trading ended on Monday. June futures sell for about $20. Therefore, on Tuesday, the price of oil ‘magically’ will be above $20 per barrel.