Why Did Crude Oil Prices Go Negative in 2020?

Crude oil traded below 0 in April 2020. Yes, you read that right. Let's see what actually happened. On April 20, 2020, WTI Crude Oil traded at -$37 per barrel. This sent shockwaves around the world, as it was the first time in history that crude oil futures traded at negative prices. It may sound very improbable, but a future can trade negatively, and it actually happened.

This was an extremely important lesson on how futures work, their pricing and the impact of a global crisis (Covid-19). 

The Key Background Factors

The pricing of crude oil below 0 had some important reasons. Let us first understand those reasons that led to this storm:

COVID-19 Demand Collapse

As we all know, there was a complete slowdown and global lockdown during COVID-19. Many industries were hit very hard. Some of the major impact was on aviation fuel consumption, which was at an all-time low. There was absolutely no transportation, and the industries were closed, which led to no manufacturing. Essentially, the major industries that use crude oil fell dramatically to a halt.

Supply Overshoot

The supply was going on as usual. In fact, most major oil producers, such as OPEC, Russia, and the US, were still pumping out huge volumes of oil. There were some talks within OPEC, but they broke down, leading to increased supply from Saudi Arabia and Russia. This worsened the imbalance.

Storage Capacity Problem

Commodities, unlike equities, require a medium for transportation and storage. The complete lifecycle of crude oil includes physical storage and delivery using tank farms, pipelines and specialised storage facilities. 

By April 2020, almost all of the US storage was nearly full. The WTI delivery hub in Cushing, Oklahoma, was also reaching its capacity. This meant that the oil being pumped had nowhere to be stored. This again worsened the situation.

Understanding the Futures Market Mechanism

Futures and equity work very differently. While a small percentage of traders just trade commodity futures. A large chunk of them actually take physical delivery of WTI futures. This means that if you hold a futures contract to expiration, you are obligated to take delivery of physical oil.

While most financial traders who just want to be speculators close their positions before expiry. But in April 2020, this was not the case. 

Many traders holding May 2020 WTI contracts did not close their positions early enough. As the expiry approached, no one wanted to take the physical delivery of crude oil. The reason was that the storage was either unavailable or extremely costly. Most of the pipelines and tanks were full. This left traders stuck with a contract they could not accept.

Why Prices Went Negative

As the expiry was coming close, everyone wanted to exit the trade. There was a lot of supply of futures and absolutely no buyer of crude oil. In fact, many traders were willing to pay others to take the contract off their hands. Because if they held on to the crude oil, they would not be able to find physical storage, leading to even bigger losses. Essentially, crude oil became worthless. The cost of forced delivery was driving the prices below zero. 

Was Crude Oil “Actually Worthless”?

There is an important distinction to be made here. Was petrol or diesel trading at zero? The answer is no. Crude oil was actually not worthless. In fact, a lot of physical crude was still being bought and sold above zero in many parts of the world.

The negative price was of the WTI May futures because the expiry was approaching. The negative price reflected how futures-market deliveries occur. This exemplified the importance of short-term storage crises and how forced liquidation dynamics play out. 

This had nothing to do with the fundamental long-term value of oil.

Conclusion

Contrary to popular belief, the fact that crude oil went below zero does not mean it had no value. It was just a result of a sudden reduction in global demand and increased supply by a major producer. It was a direct consequence of storage constraints and forced liquidation pressure. It was one of the rarest events in financial history, showcasing how logistics, futures structure, and panic can produce outcomes that seem impossible in normal conditions.