Oil prices plunged by their largest amount in modern history on Monday. Front-month West Texas Intermediate (WTI) futures prices crashed by 306%, sending prices into negative territory for the first time since futures began trading in 1983. WTI settled at -$37.63/barrel (negative $37.63).
The previous all-time low for prices was $9.75 set in April 1986.
With prices trading below zero, producers are not only losing money on every barrel pumped, they have to pay someone to take the oil off their hands.
The sudden plunge in prices comes one day ahead of the expiration of the front-month May oil futures contract. Later-month contracts were also down, but not nearly to the same extent.
WTI for June delivery, for example, was last trading down by 18.7% to $20.35; WTI for July delivery was lower by 10.6% to $26.29; and WTI for August delivery was slipping by 8.7% to $28.50.
Oil Drops Below Zero
The front-month May contract was taking the brunt of the selling as its prices converged with those of the spot market, and traders—unable or unwilling to take physical delivery—were forced to sell.
According to analysts, May will potentially be the month that sees the greatest demand destruction from the coronavirus—upward of 20 million to 30 million barrels per day.
That overwhelms even the 9.7 million barrel per day cut in production announced by OPEC and its allies a week ago. Traders worry that, with supply running well ahead of demand, storage tanks could fill up, leaving nowhere for freshly pumped crude oil to go.
U.S. commercial crude oil inventories totaled 503.6 million barrels per day on April 10, according to the Energy Information Administration. Excluding oil that was in pipelines and in transit by water and rail, stockpiles totaled 374.8 million barrels, or 57% of the EIA’s estimate of the country’s working storage capacity.
That still leaves about 278.6 million barrels of storage capacity that could be used in the U.S., but that won’t last long if supply continues to outpace demand by millions of barrels per day. Moreover, that storage capacity is predominantly available in the Gulf Coast. Elsewhere, inventories may fill up faster, and without adequate pipeline capacity, there will be nowhere for the oil to go.
Already, certain grades of crude have plummeted to once-unimaginable levels on concerns that local storage is already getting full. Alaska North Slope crude oil was last trading at -$49.63, while Wyoming’s Bakken Guernsey traded at -$38.63.
Largest Spread On Record
Such low prices for oil will likely force some producers to shut-in their production. There is hope that those production curtailments, along with the OPEC cuts and a rebound in demand in the coming weeks, will be enough to put oil prices on a firmer footing by the summer.
That’s why WTI for June delivery is trading at such a steep premium to front-month prices. In fact, the spread between first and second month contracts has never been greater. During the financial crisis it was as high as $8.50; today, it’s $57.
Front-Month/Second-Month Spread Blows Out
Fortunately for anyone holding oil-tracking ETFs, that spread and today’s decline in front-month May futures doesn’t matter much. The largest oil ETF, the United States Oil Fund LP (USO), is already holding the majority of its portfolio in June oil futures. (Read: Biggest Oil ETF Shakes Up Structure)
USO, which has seen a whopping $4.3 billion worth of inflows this year, rolls its positions two weeks before expiration, so it is safe from the extreme moves that sometimes take place as a contract nears its end.
This is not to say the fund is performing well by any means. The ETF is down 10.3% today, in line with the move lower in June oil futures. The fund will also have to contend with the June-to-July roll in a few weeks, and there is a massive 28% premium for July contracts compared with June. That will make it extremely difficult for the fund to make up lost ground even when oil prices eventually rebound.
For longer-term investors who are interested in getting exposure to any potential rebound in oil prices, energy equity ETFs may be the better bet.