Financial markets reeling from the impact of the COVID-19 experienced another first today: U.S. oil prices below zero.
It happened in the oil futures market, where the current contract for May expires Tuesday. Investors holding long positions in the contract must take physical delivery of the oil unless they can roll the May contract over to June, but that was almost impossible to do on Monday. There were no buyers for the May contract because there is nowhere to store the oil. The West Texas Intermediate (WTI) May futures contract closed at $-37.63 a barrel.
Owners of May oil futures contracts had “to sell down to the next level to whatever someone is willing to pay,” explained Ron Lawson, managing director of Logic Advisors, which provides strategic and tactical macroeconomic guidance to major participants in the world’s commodity markets. The owners of the May oil contract include ETFs that “own futures to mirror the price of crude,” said Lawson.
Storage capacity in the U.S. is full because demand for oil has fallen sharply due to lack of demand and because many fracking operators continue to pump since they lose money if they stop and restart later, explained Lawson.