What happened on April 20, 2020 in the oil futures market?

The May contract price for WTI crude opened at $18 a barrel on April 20 and closed at minus $37.6 per barrel. This was the first time in the history of the New York Mercantile Exchange (NYMEX) that the price of futures contracts was negative. This fall in oil futures prices is one of the results of supply glut in the oil market and lack of storage capacity. But more precisely, the reason should be attributed to the existing restrictions in futures trading prior the expiration date of contracts.

Why the benchmark US oil prices did headed to negative territory for May 20 delivery?

Owners of crude futures contracts for May delivery on NYMEX typically want to sell their contracts before the expiration date on April 21, 2020. The next day, traders usually buy futures contracts for June delivery. This strategy of traders in the futures market is called contract rollover. The goal of traders to sell off their pre-expiration purchases is that if they fail to sell the contract until the expiration date (April 21), the futures contract becomes physical and its holder is obligated to take on the crude oil specified in May contract. In the current situation, according to available figures, Cushing's crude oil storage facility was about 77 percent full by Friday (April 17), and is forecast to be filled up in the first week of May 2020.

As storage reaches capacity at delivery point in Cushing, Oklahoma in May, WTI futures contract for May delivery lost attraction for buyers are expiration date (April 21) approached and the probability of cargoes becoming physical increased. Avoiding forced physical deliveries and paying high warehouse fees in May, traders were forced to pay buyers to take oil off their hands ahead of the expiry of futures contracts which led to negative prices in the April 20 market session.

It should be noted, however, that many traders who had a buying position for this type of futures contract had closed their positions after realizing the risk involved in previous weeks, and therefore the volume of purchase contracts for WTI crude in May 2020 had significantly dropped. Only 100,000 contracts were impacted by the price fall. This is one tenth of the total WTI futures contracts for June 2020 delivery.

Will the futures contract price for WTI crude for June 2020 also be negative?

At present, the WTI June contract has become a prompt contract, which will expire on May 19, 2020. On April 20, the value of the contract fell by $4.6 per barrel, reaching $20.43 a barrel. The price is expected to gradually rebound due to traders' efforts to sell their purchase contracts in the first week of May 2020 and replace it with the July contract, as concerns are growing about Cushing storage filling up following the escalation of US oil supply surplus which is expected to sharply plunge the prices for June contact in the coming weeks. Oil prices are expected to fluctuate greatly in the coming weeks as oil storage reaches capacity in the United States. Given that there is little capacity for crude storage, we should be seeing more American oil wells being shut down.

Why are the prices for some crude oil in the United States and Canada single-digit or negative?

As the WTI futures contract for May delivery headed to the negative territory, we have witnessed that the spot price of some types of crude oil in the United States and Canada has also reached single digits and negative. The negativity of these crudes means that producers have to pay people to provide such services as transferring and storing their oil output (similar to carrying and disposing of waste for citizens). The reasons for the single-digit or negative price of oil in some parts of the United States and Canada should be sought in the following:

A) Crudes like WTI in Midland and WCS crude in Canada, are produced in landlocked fields. As an example, the location of WTI oil production in Midland is 500 miles off the Gulf of Mexico, and producers in the region have to pay for logistics costs to transport their crude oil to oil depots in the Gulf of Mexico.

B) Stopping and resuming production from oil wells in the United States is subject to fines and costs for oil companies. The cost of a production halt for an average US oil producer is estimated at about $40-$20,000 per year, however, if the price of each barrel is $10 lower than its production costs, the company will have pay $600/months and $7,200/year for producing every barrel of oil.

Due to the above, producers continue to produce non-economic crude and are willing to sell their crude oil at a negative price.

Crude oil prices, such as Brent crude oil produced near the North Sea, fell to a low of $15.29 a barrel on April 1 and often fluctuated around $20 a barrel, which is very close to the final cost of production. Therefore, in the current situation, crude oil, which has even higher production costs but has easier access to the sea and storage infrastructure, has a better position than one is cheaper to produce but difficult to be carried to storage infrastructure like that produced in the US and Canada. This will eventually lead to an estimated 5 mbd production cut in the Americas.