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Oil Costs Less Than Zero! What?

A crazy headline for crazy times. U.S. oil futures went negative for the first time Monday, a chaotic demonstration of the dwindling capacity to store all the crude oil that the world’s injured economy would otherwise be using. But, with commodities futures contracts, it’s not that simple.

The front part of the oil futures ‘curve,’ which is the May contract that expires on Tuesday, was hit the hardest since it applies to fuel that’s set to be delivered while most of the country remains on complete lockdown thanks to the coronavirus.

The historic low price reflects uncertainty about what buyers would even do with a barrel of crude in the near term. Refineries, storage facilities, pipelines and even ocean tankers have filled up rapidly since billions of people around the world began sheltering in place to slow the spread of the deadly coronavirus. Hardly anyone is flying, driving, or taking a cruise anywhere.

Yes, the price of a barrel of West Texas Intermediate (WTI) crude to be delivered in May (and expires Tuesday), which closed at $18.27 a barrel on Friday, dropped more than 100% and ended Monday at negative $37.63. That effectively means that sellers must pay buyers to take barrels off their hands.

Oil Costs Less Than Zero! What?

This is obviously not good for the oil and gas industry or the economy, but all is not lost. This is a temporary reflection of an unprecedented time. The reality is certainly bad, but it may be more realistic to look at the most actively traded futures contract (WTI for June delivery) which lost 18% on Monday to close at $20.43. The international benchmark, Brent crude, which has already rolled to the June contract, settled 8.9% lower at $25.57 per barrel.

Oil due to be delivered in November, however, ended at around $31.66.

Those higher oil prices, like the recent surge in stocks, reflect optimism that the global economy will bounce back later this year, and that sufficient demand for fuel will return to soak up some of the glut that was building even before the pandemic.

There’s no question that these are tough times for oil and gas, but demand will return eventually and prices will rise.


Mike Minter

As Chief Investment Officer, Mike directs the overall investment strategy, develops portfolio allocations, oversees trading and rebalancing, and conducts research and analysis. As a perpetual student of investing and the markets, Mike considers himself obsessed with the subject. He has earned the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Certified Fund Specialist® designations. He is also an active member of the Houston chapter of the Financial Planning Association (FPA).   Read Mike’s Profile HereRead More Articles by Mike

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