21 Apr Here’s What Negative Oil Prices Really Mean
On Monday, oil prices crashed as the May futures contract for WTI crude, a widely used benchmark for the price of a barrel of oil, dropped into negative territory for the first time in recorded history to about $30 below zero. In very general terms, the price went negative because the May futures contract expires today (Tuesday, April 21) and holders of the long contract would have been required to take physical possession of the oil. The problem is that, largely because of the coronavirus, demand for oil is so low that global storage is filling up and there’s no place to put it.
Intuitively, a negative price means that someone will pay you to take something off their hands. Yesterday’s activity, however, does not mean that someone will give you a barrel of oil and $30. The price of the futures contract expiring in June remains at about positive $20 and Brent crude, another global benchmark used widely in Europe, also remained at around $20. So the actual price of a barrel of oil is likely still positive, but because of how futures are priced and delivered, only the May contract went negative.
While yesterday’s activity was not as bad as headlines may indicate, it was still emblematic of an industry in serious peril. The double whammy of a price war among OPEC+ and the unprecedented decline in global demand due to the coronavirus has decimated the global oil industry. In the U.S., the likely effect of this industry pressure will be widespread bankruptcies among U.S. oil producers, leading to job losses and defaults. We expect the volatility of this dislocation to bleed over into equity markets while the supply of and demand for oil rebalance.
The oil industry is not one where companies can just flip a switch to turn on and off – shutting down and starting up production is highly labor-intensive – so it could be a long time before oil prices and companies normalize, even after much of the rest of the world gets to the other side of the coronavirus.