The Strategist

US WTI falls below zero for the first time in history

04/21/2020 - 03:30

The price of WTI American oil fell by tens of percent. First, it hit the lowest price in history amid investors' concerns about overcrowded oil storages amid record low global demand. Later, WTI quotes have fallen below zero - to minus $ 40 per barrel.

This is the first time since 1983, when oil futures began to be traded on the stock exchange.

When the delivery time for futures is nearing, traders must decide: either to accept the physical supply of oil under the contract, or sell it and switch to the contract for delivery next month.

Most futures traders do not need physical supplies. In the current situation, such traders are getting rid of May contracts and switching to June ones.

Since a large excess of oil has formed on the market, traders cannot find buyers for their May contracts, under which oil will be physically supplied, and there’s nowhere to store it, Reuters notes. As a result, prices fell to negative levels - this means that sellers pay to buyers so that the latter take oil.

Oil prices have been under intense pressure in recent weeks. They continued to decline even after OPEC + countries agreed to reduce oil production by 9.7 million barrels per day.

The deal, concluded by Saudi Arabia and Russia after the previous break of agreements and the collapse of the price of oil, was joined for the first time by the United States. Thanks to the shale revolution, the latter became one of the largest oil producers in the world.

However, this deal cannot quickly fix the situation with a glut in the global oil market, Reuters writes. Brent crude prices have fallen by about 60% since the beginning of the year, while US oil futures have fallen by about 85%, the agency recalls.

US prices have fallen to levels well below the breakeven level needed to produce shale oil. This led to a halt in drilling.