Historic day for oil markets as WTI crude crashes below zero for first time

Oil futures collapsed to below zero for the first time ever as the deepening economic turmoil caused by the coronavirus crisis left traders desperate to avoid taking delivery of physical crude.

In an unprecedented day of trading, the price for the May contracts wiped out all value, breaking every low for oil prices since 1946. The exchange where WTI futures trade said the contract would be allowed to price below zero. The extreme move showed just how oversupplied the U.S. oil market has become with industrial and economic activity grinding to a halt as governments around the globe extend shutdowns due to the swift spread of the coronavirus. An unprecedented output deal by OPEC and allied members a week ago to curb supply is proving too little too late in the face a one-third collapse in global demand.

On Monday, a technical oddity exacerbated the price plunge as traders fled the May futures contract ahead of its expiration tomorrow. The following month’s contract fell 12 per cent to US$22.05 a barrel, making the spread between the two months blow out more than US$20.

“There is little to prevent the physical market from the further acute downside path over the near term,” said Michael Tran, managing director of global energy strategy at RBC Capital Markets. “Refiners are rejecting barrels at a historic pace and with U.S. storage levels sprinting to the brim, market forces will inflict further pain until either we hit rock bottom, or COVID clears, whichever comes first, but it looks like the former.”

Since the start of the year, oil prices have plunged after the compounding impacts of the coronavirus and a breakdown in the original OPEC+ agreement. With no end in sight, and producers around the world continuing to pump, that’s causing a fire-sale among traders who don’t have access to storage.

There are signs of weakness everywhere. Buyers in Texas are offering as little as US$2 a barrel for some oil streams, raising the possibility that producers may soon have to pay to have crude taken off their hands. In Asia, bankers are increasingly reluctant to give commodity traders the credit to survive as lenders grow ever more fearful about the risk of a catastrophic default.

In New York, West Texas Intermediate for May delivery dropped as low as -US$1.98 a barrel. It’s the lowest in continuation monthly data charts since 1946, just after World War II, according to data from the Federal Reserve Bank of St. Louis. Brent declined 6.5 per cent to US$26.22.

Crude stockpiles at Cushing — America’s key storage hub and delivery point of the West Texas Intermediate contract — have jumped 48 per cent to almost 55 million barrels since the end of February. The hub had working storage capacity of 76 million as of Sept. 30, according to the Energy Information Administration.