Industry Updates

Oil prices plunge into negative territory for first time in history

George Geddes

a large machine in a field

The West Texas Intermediate (WTI) oil futures contracts for May crashed into negative territory on Monday as prices fell as far as -$38.76 per barrel.

Prices recovered to roughly $1.40 per barrel on Tuesday morning, the day the May futures contracts expire, but this only lasted for a couple of hours. It has since fallen below zero again to nearly -$2 per barrel.

Monday’s negative price is a result of oil supply outweighing oil demand after the coronavirus outbreak caused a global shutdown and a decrease in oil consumption.

Oil producers are having to pay storage facilities and buyers to take the stockpile of barrels that are not being bought.

After the May contracts expire later today, the June contracts will become the active duration. June contracts have been trading at $21.40 per barrel.

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However, despite there being a near $60 difference in the price of oil in May to the price in June, it will be very difficult to obtain these profits, according to Nitesh Shah, director and commodity strategist at WisdomTree.

Shah said: “One could be tempted to think that you could make close to $60 per barrel out of thin air once we shift to the June contract. But you cannot, unless you have lots of physical storage space to hold the oil delivered for a month.”

The WisdomTree WTI Crude Oil ETC (CRUD) tracks the total return investment in crude oil. On Monday, it had a daily return of -10.7%, contributing to its year-to-date return of -69.5%.

WisdomTree had to terminate two of its leveraged oil ETPs in March after they triggered a clause in their rules following extreme volatility to the price earlier in the month.

Investors that maintain a long position for the May contracts will be delivered the oil between 1 May and 31 May and will need somewhere to store it.

However, Shah said most of these investors would have rolled out the contract before yesterday’s big price moves.

All other WTI oil futures contracts did dip in price but managed to maintain a positive value.

The oversupply in oil comes after OPEC agreed to cut over 10% of global oil production.

Artur Baluszynski, head of research at Henderson Rowe, said: “While yesterday's negative WTI futures price might have been a one-off glitch, it does confirm there is trouble ahead.

“The COVID-19 crisis is destroying the global demand for energy and without a timeline on the end of the lockdown in the developed world, the market is suffering from chronic oversupply.”

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