On April 20, 2020, the price of West Texas Intermediate (WTI) crude oil futures contracts for May delivery went negative for the first time in history. This meant that traders were paying buyers to take delivery of oil as they did not want to hold physical barrels of oil due to the lack of storage capacity amid a significant drop in demand caused by the COVID-19 pandemic.
The negative prices were driven by a combination of factors, including the oversupply of oil due to a price war between Saudi Arabia and Russia, which flooded the market with oil, and the drastic decrease in demand for oil due to the global economic shutdowns caused by the pandemic. As a result, oil storage facilities were quickly filling up, and buyers of oil futures contracts had no place to store the physical oil, which led to panic selling.
Furthermore, the futures contracts for WTI crude oil traded on the New York Mercantile Exchange (NYMEX) are settled through physical delivery of the underlying commodity, rather than cash settlement. Therefore, when the May futures contract was set to expire on April 21, traders who had bought contracts to take delivery of oil had to find a place to store it. However, due to the lack of available storage capacity, buyers were willing to pay others to take delivery of the oil, resulting in negative prices.
The negative prices were a temporary phenomenon, and prices for crude oil futures contracts for June delivery and beyond remained positive. However, the incident highlighted the fragility of the oil market and the importance of having adequate storage capacity to prevent such extreme price movements.
