Oil prices started slipping early Monday morning.
Then, they fell off a cliff. By lunchtime, the May futures price for West Texas Intermediate Crude had crashed into negative territory for the first time in history.
Over a period of hours, the price plummeted to as low as negative $40 dollars a barrel, a catastrophic decline of 300% from the day’s opening trades.
Contracts for May deliveries of crude were set to expire Tuesday. That meant speculators not prepared to take a physical delivery of oil in Cushing, Oklahoma, next month needed to rapidly offload their obligations.
The oil market has been battered for more than a month, as a steep drop in demand due to COVID-19 collides with a price war between major oil-producing nations Saudi Arabia and Russia.
As prices fell, speculators were left scrambling to find physical buyers, such as refineries, to claim the contracted crude. But refineries increasingly don’t have the space and storage tanks are filling rapidly worldwide. In some cases, storage has become so expensive that it might just be cheaper to pay someone else to take the oil.
University of Wyoming economist Rob Godby called the forces that allowed the plunge a “technical problem” caused by an expiration deadline – the one time that speculative futures must align with the physical market.
“Oil still has value,” he said. Throughout Monday, June WTI futures and Brent crude, the European benchmark, stayed largely above $20 a barrel.
“If you’re holding a future, you’ve now realized that you can’t sell that delivery or you have no place to put it,” Godby said. “Yesterday was an opportunity to see what producers are facing. At this moment in time, as oil comes out of the ground, they literally can’t get anyone to take it because no one needs it. They’ve already got oil. And more importantly, they’re running out of places to put it.”
According to Petroleum Association of Wyoming Communications Director Ryan McConnaughey, storage options for the state’s producers are increasingly limited.
“There is a little bit of space left in the Guernsey oil tank farm, but it’s filling up pretty quickly,” he said. “And the pipeline out of Wyoming is full as well.”
In order to avoid a similar situation in June, the world’s oil markets will have to balance and do it quickly. Curtailing that oversupply will be both a political and a physical challenge.
The crash came despite a recent deal from OPEC+ nations that cut production by more than 10 billion barrels a day worldwide. Supply has outpaced demand to such a degree that the agreement, lauded as unprecedented, was also ineffective.
At the same time, shale producers, like those that operate in the Powder River Basin, can’t simply shut in a well without risking damage to the underlying reservoir and compromising future profits. For some producers, it makes more financial sense to temporarily pay someone to take their oil rather than risk the loss of all revenues.
McConnaughey said some PAW members face the added challenge of operating under “produce or plug” contracts.
“Our members are really dealing with issues coming at them from all sides,” he said. “It’s going to be a difficult situation here for the foreseeable future.”
President Donald Trump on Monday called on Congress to fill any remaining space in the Strategic Petroleum Reserve, a collection of hollowed out salt canyons on the Gulf Coast that can hold more than 700 million barrels of oil and is currently about 89% full.
Oil companies have called for opening the reserve for weeks, but as the unbalanced market continues to gush crude, even that is only a temporary solution.
“It happened so fast that people couldn’t adjust to it,” Godby said of what Monday’s events might mean future prices and the Wyoming economy. “That’s how much demand has been destroyed so quickly.”
The economist described the experience of a normal economic recession in terms of going over a hill and picking up speed on the descent.
“This was like being in an elevator where the elevator cable snapped, and we’re still in free fall,” he said. “We don’t know when we’re going to hit bottom.”