With a history in the making, crude oil futures plummeted below zero for the first time in history, trading deep into negative territory as of 2:30 pm EST, as the worsening economic fallout caused by the Coronavirus crisis has left traders in a bind, as they panic to avoid taking delivery of physical crude.
In an unprecedented day of trading, the price for the May contracts destroyed all market value, breaking every low for oil prices since 1946. The exchange where WTI futures trade is allowing the futures contract to trade below zero, with markets trading as low as an unbelievable -$40 a barrel. The extreme move displays just the incredible deluge that exists in the U.S. oil market as a result of industrial and economic activity stymied as governments around the globe continue to enforce quarantines and stay-at-home regulations due to the rapid spread of the coronavirus.
The crude crash comes after a historic output deal by OPEC and allied members that occurred over a week ago to stem supply is proving too futile, given a one-third collapse in global demand.
While the front month, expiring contract for May futures is trading negative, the new June contract is more active and is trading near $21 a barrel, creating a huge contango, or situation where futures prices in the next month trade at a premium to those in the current month, often due to oversupply and in this case limited storage capacity.
“The collapse…is mostly a reflection of traders rolling contracts to June as no one wants to take delivery because storage capacity is getting close to being reached,” said Edward Moya, senior market analyst at Oanda, in a note.
The front part of the oil futures ‘curve,’ which is the May contract that expires tomorrow, was brutalized, with the only buyers of oil futures being entities that need to physically take the delivery of the commodity such as oil refineries or airlines. But storage tanks are filled, so they don’t need to take delivery, and there is a dearth of consumer demand due to the coronavirus.
“While we are probably setting the stage for a significant bottom in oil, it does not matter for the May futures contract that will be delivered into a nightmarish bearish situation,” said Phil Flynn, market analyst at Price Futures Group, in a note. “Not only has demand ground to a standstill, but the impact of oil cuts from OPEC+ also will not start in time for the current delivery.”
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