April 20, 2020, will be remembered among oil investors as the day the “crudequake” sent prices into negative territory in the U.S. for the first time in history.
The West Texas Intermediate (WTI) futures, the U.S. crude benchmark, sunk as low as minus $40.32 and threatened to tarnish its image.
Spot prices also fell below zero, and panic-stricken oil producers and traders dumped a large volume of futures contracts.
Oil tankers carrying enough crude to satisfy a fifth of the world’s daily consumption gathered off California’s coast with nowhere to go as fuel demand collapsed.
The more than 20 million barrels of crude is the highest volume of crude to ever float off the West Coast at any one time, according to Paris-based Kpler SAS, which tracks tanker traffic.
Here are five key things you need to know about the “crudequake”.
The world has never seen negative oil prices before and the negative prices sent shockwaves across the U.S. Investors have learnt that negative oil futures prices are possible and they can happen in a hurry, as the cycle of selling feeds on itself, and desperate traders and holders of the paper contracts will pay others to remove them of their obligation to find a home for oil they have no interest in taking delivery of.
A drastic decline in consumer demand as a result of the coronavirus pandemic has created a difficult new world for the oil industry. The sub-zero prices raised new questions that were beyond how long and how deep covid-19 would cut demand.
Investors and traders got anxious over reports that storage capacity was running perilously low at Cushing, Oklahoma, the sole delivery point for WTI crude, and rushed to dump futures contracts. “Investors and traders were so desperate not to receive oil that they were willing to pay others to take the barrels instead,” a Wall Street Journal report noted.
The covid-19 pandemic has battered the oil markets in a way that has not been seen before. Energy analysts, who largely rely on past events, are finding it hard to predict where prices are going. “Covid is simply outside what even the most far-reaching energy market scenarios had considered,” according to Arthur van Benthem, a Wharton professor of business economics and public policy.
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Cheaper crude will not necessarily translate readily into bounties for consumers. There are still other costs that will keep prices high at the pump. Storage costs, distribution, and government taxes are expected to keep the prices high. Gas prices at the pump will not go to zero even at negative crude prices.