Negative Oil, April 2020Medium
For one afternoon a barrel of oil was worth minus thirty-seven dollars — not because demand vanished, but because there was nowhere to put it.
3 min read · 597 words · Updated
What happened
- March–April 2020 — pandemic lockdowns collapse fuel demand while production keeps flowing. Crude accumulates faster than it can be consumed.
- Storage fills — WTI futures deliver physically at Cushing, Oklahoma, a landlocked hub with finite tank capacity. By mid-April, spare capacity is effectively spoken for.
- 20 April 2020 — the May contract expires the next day. Holders who cannot take delivery must sell, and the buyers who could store it are already full.
- The settlement — the contract settles at −$37.63: sellers paying buyers to take the obligation away. The June contract, still weeks from delivery, trades above $20 the same day.
The mechanism
Point at a line to read what it is doing.
How do I read this chart?
Days to expiry across, price up. Two contracts on the same commodity, and the one with a delivery obligation days away behaves nothing like the one with a month to go.
Where this is explained properly:
The axes carry no scale on purpose. Every line here is a stylised shape drawn to show a mechanism, so there is no number to read off one — and any figure taken from it would be invented.
- Futures converge to physical reality at expiry. Away from delivery, a futures price is a financial opinion; at delivery it is a logistics problem with a deadline.
- No storage means no arbitrage floor. The usual "buy cheap, store it, sell forward" trade that stops prices from falling too far requires somewhere to put the barrels.
- Financial holders had no delivery capability — index products and retail-facing funds had to be out before expiry, and everyone knew the deadline.
- The negative price was brief and local: one contract, one delivery point, one afternoon. It was not the price of oil in the world.
What it teaches
- Know the delivery mechanics of anything you hold — including the date by which you must be out (see commodities).
- Storability determines whether a curve has an anchor. Unstorable markets like electricity live with this permanently.
- A futures index is not spot exposure. The roll is where the difference accumulates, and at expiry it can become abrupt.
- "The price cannot go below zero" is a statement about assets, not about obligations. A contract to receive something you cannot store is a liability.
The mechanisms behind this
Every case on this site is an instrument or a mechanism doing exactly what it was built to do, in a situation nobody had pictured. These are the pages that explain the machinery:
- Commodity futures — why a contract has to meet physical reality on its last day.
- Commodity ETCs & ETPs — the retail products that were holding the contract that went negative.
- Curve construction — the storage arbitrage that normally puts a floor under the price.
- How to read any market number — “the oil price” was one contract on one day, not the price of oil.
Information and education only. This is a simplified summary of publicly reported events, written for teaching purposes. It compresses a complex episode, omits material detail, and does not characterise the conduct or motives of any person or organisation. It is not advice, not a forecast, and not a recommendation about any market, instrument or institution.
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