Why Oil Prices Fell Below Zero

In the latest sign that the world economy is collapsing into a black hole, the price of oil dropped below zero for the first time ever Monday, with futures for U.S. crude delivered in May wrapping up at negative $37.63 per barrel. In practical terms, this means that anybody who is supposed to receive a shipment of American crude but doesn’t want it will have to pay somebody else to take it.

How come? Because we are literally running out of places to put all of the extra oil we’re not using, because people have stopped driving, flying, or living any semblance of normal life while the country descends into a state of coronavirus-induced catatonia. As the Wall Street Journal puts it: “The historic low price reflects uncertainty about what buyers would even do with a barrel of crude in the near term. Refineries, storage facilities, pipelines and even ocean tankers have filled up rapidly since billions of people around the world began sheltering in place to slow the spread of the deadly coronavirus.” This is happening despite the deal Donald Trump helped broker between Russia and Saudi Arabia to cut production and stabilize prices. Good try, good effort, I guess.

Buyers are still willing to pay positive sums of money for crude delivered later in the year. Contracts for June closed the day above $20 a barrel, which suggests that traders expect the current glut to ease up a bit, either due to further production cuts or because they think the economy will have recovered ever so slightly by then. They just really don’t want to be responsible for dealing with a bunch of hydrocarbons right now. This state of affairs—when a commodity’s price is higher in the future than the present—is known as contango, by the way, and while that little bit of vocab is in no way essential to understanding what’s going on, it is possibly my favorite bit of financial markets. It’s like a tango, but contagious.

The storage problem also appears to be worst in the United States. CNN notes that investors are especially worried that storage is reaching capacity in Cushing, Oklahoma, the domestic industry’s key transit hub. Brent crude, the international benchmark variety that mostly gets shipped out on tankers, is still trading at $25.70, presumably because it has a wider market and there are just more places to stow the stuff.

Meanwhile, “Politico” (the magazine) leaves us with this bit of dark comedy:

To make matters worse, a group of oil tankers that left Saudi Arabia before the country agreed to cut production is currently heading toward the U.S. That oil will further strain storage capacity unless another country buys them before they reach the U.S.

“It’s like some movie from the 1980s where the U.S. president and the Soviet premier come to an agreement” to halt a nuclear war, “but one plane missed the call back,” said one industry official tracking the ships but was not authorized to speak to the press.

Anyway, a prolonged oil bust is going to have a devastating effect on energy jobs across the United States, while low prices could make it difficult to transition away from fossil fuels in order to save the planet from melting. And if you’ve got a shipment of crude coming in, get used to saying the words, “Take my oil, please.”

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