Oil prices plunged on Monday as traders got caught in a desperate race to offload contracts for just about any price they could get.
Oil prices plunged on Monday as traders got caught in a desperate race to offload contracts for just about any price they could get.
The price of a contract to deliver West Texas Intermediate crude oil next month plunged below zero, as traders got caught in flurry to sell their contracts before having to actually receive the oil.
The oil price is determined through investments known as futures contracts, which are agreements to buy and sell a certain amount of oil at a certain time in the future. The contract to deliver oil in May has been the most commonly traded contract of late, so it is currently considered to be the best proxy for the current oil price. Soon June’s contract will be the benchmark.
Typically the contracts are bought and sold countless times before the oil is actually delivered to the final buyer. But the May contract is set to finalize on Tuesday, which means anyone holding contract at that point is agreeing to actually physically acquire the oil.
That’s easier said than done lately, as storage tanks in North America are almost full to the brim, making it hard to find a place to put more oil. The U.S. oil hub in Cushing, Okla., had 55 million barrels of oil in storage as of Friday, the highest level since 2018.
Monday’s startling oil price plunge was caused by traders feverishly trying to offload the contract before they actually have to find a place to keep the oil starting next month. When the futures market closed for the day, the May WTI contract sat at -$37.63. If that price holds until the end of Tuesday, it means anyone holding that contract will have to pay more than $37 for the right to also hand over a barrel of oil in May.
“This may prove to be one of the worst deliveries in history,” said Phil Flynn, senior market analyst at Price Futures Group in Chicago. “Nobody wants or is in need of oil right now.”
CME, which runs the market on which oil futures contracts are traded, clarified just last week that negative prices were theoretically possible, even though they had never happened in oil. “Support for zero or negative