BREAKING: Crude Oil Prices Drop Over 100%, Turn Negative on May Contract for First Time in History

This story is developing. 

Per CNBC: BREAKING: Crude oil price on May contract goes negative for the first time

CNBC reports the soon-to-expire May contract for the U.S. oil benchmark was on track Monday to finish in single digits for the lowest close and biggest one-day plunge on record for a front-month contract, reflecting a growing glut of crude and a lack of storage space.

West Texas Intermediate crude for May delivery CLK20, -231.36% CL.1, -231.36% was down $15.71, or 86%, at $2.66 a barrel. The May contract expires on Tuesday. The one-day drop would be the largest on record going back to 1983, while a finish near its current level would be far below the previous all-time low for a front-month contract at $10.42 a barrel set on March 31, 1986, according to Dow Jones Market Data.

The huge drop in the nearby contract reflects traders scrambling to exit long positions that would require them to take physical delivery of crude amid dwindling storage space. It also reflects a convergence with the physical spot price for oil.

“The collapse…is mostly a reflection of traders rolling contracts to June as no one wants to take delivery because storage capacity is getting close to being reached,” said Edward Moya, senior market analyst at Oanda, in a note.

The June contract CLM20, -16.30% , which is the most actively traded, was down $2.82, or 11.2%, at $22.24 a barrel.

The ever-widening discount for May versus the June contract reflects “all the bearish supply and demand drivers that remain permanently in place,” he said.

“While we are probably setting the stage for a significant bottom in oil, it does not matter for the May futures contract that will be delivered into a nightmarish bearish situation,” said Phil Flynn, market analyst at Price Futures Group, in a note. “Not only has demand ground to a standstill, the impact of oil cuts from OPEC+ also will not start in time for the current delivery.”

The trading action comes after the May contract posted a 19.7% weekly loss on Friday.

WTI contracts for later delivery have traded at much higher prices than the front-month May contracts. The steep upward slope for prices in later months in crude, a condition known as contango, underlines the dearth of storage of crude in recent weeks as the coronavirus wreaks havoc on global demand for oil.

The expiration of the May contract and the fundamental demand problems have combined to put outsize pressures on the energy sector.

“Price discovery is complicated, more so than usual, by the soon-to-expire WTI NYMEX front-month contract for May 2020,” wrote Stephen Innes, global chief market strategist at AxiCorp, in a Sunday research note.

“Even more so as the near-term prices are trading massively discounted due to storage premiums getting packed in the far dates, creating very squeezy conditions on the expiring contract as final day settlement (FDS) looms,” he wrote.

Monthly reports from the Organization of the Petroleum Exporting Countries and the International Energy Agency have underscored a period of flagging appetite for crude, even as major oil producers have forged a historic pact to curb output by some 10 million barrels a day, in an effort to end a price war between Saudi Arabia and Russia and stabilize prices that have been swooning.

In addition to OPEC and its allies trimming production, there is also the possibility on April 21 that the Railroad Commission of Texas, which regulates the oil-and-gas industry in the state, could move to limit output in the region.

Pippa Stevens writes “This oil price crash isn’t as bad as it seems — here’s why.”

By one measure, U.S. oil fell more than 100% to a negative value on Monday — something it’s never done before. But the picture in the oil market might not be as bleak as this eye-popping decline would suggest.

Futures contracts are tied to a specific delivery date. Toward the end of a contract’s expiration date, the price typically converges with the physical price of oil as the final buyers of these contracts are entities like refineries or airlines that are going to take actual physical delivery of the oil. 

Futures contracts ultimately are contracts for psychical delivery of the underlying commodity or security. While some people in the market speculate on the contracts, others are buying and selling because they have use for the commodity itself. Near the contract’s expiration, traders just start buying the next month’s futures contract. Those who stay in the position to the final day are typically buying the physical commodity, such as a refiner.

The contract that fell more than 100% on Monday is for May delivery, and it expires on Tuesday. With the coronavirus pandemic leading to unprecedented demand loss, and with storage tanks quickly filling up, there is no demand for this oil contract expiring Tuesday. 

That’s why it turned negative, meaning producers would pay to get this oil off their hands because there is no one that needs that oil this week with the country shutdown.

Futures contracts trade by the month. The contract for June delivery traded 16% lower at $21.04 per barrel.

So when traders and buyers wake up Tuesday, oil will be back above $20.

The U.S. Oil Fund, which tracks the price of various futures on oil, fell just 10%.

Trading volume was also relatively thin in the May contract. According to data from the CME Group, volume stood at roughly 126,400. By comparison volume for the June contract was nearly 800,000.