Why WTI Oil just crashed to $0

Yesterday was an interesting day for any commodity trader or frankly anyone who works in the energy sector period. For the first time in history, the Price of WTI oil crashed to a negative value. WTI (West Texas Intermediate) is the ticker symbol for the grade of oil that is normally pulled out of middle America but the Texas oil fields, in particular, have a large amount of it. It is known for having a very low density (amount) of sulfur compared to other crudes extracted on the planet, some people also refer to it as Texas light sweet or Light crude.

Now the big question is why did it crash to having a negative value in the first place?  To understand that we need to make sure we remember the current economic realities. The Covid-19 work stoppage has had nothing short of an epically negative impact on the world’s economy, with National and state stay at home orders in place very few people are working and traveling the same way they have been for their entire life.  The effect this has had on gas and oil prices is clear and obvious to see (the demand for oil now is far less than it was a month ago). Consumption is way down and with the uncertainty of the lockdowns and what will happen when it comes to an end are heavily effecting market fears.

But even with all of that being taken into account the crude just should not be worth that little. This is where global crude storage comes into play and futures.  First off crude oil needs to be refined to be usable in an industrial manner. So when crude is pulled out of the ground and sent to a refinery it is always put into storage or holding tanks that the refinery pulls from to process.  Those refineries are completely out of storage space, the lack of consumption caused refineries to slow down their output resulting in a backup of storage. Now the crude storage capacity in North America is essentially maxed out.

Normally supply and demand imbalance as this would warrant a price collapse but in this case, it needed one last thing to push it over the edge, and in this case, it is Oil futures expiring contracts.  See corporations who consume and use oil and oil derivatives need to protect themselves with market and price hedges, they do this with oil futures which is the right to buy oil at a specific price when the contract is up, this allows companies to know for certain what they will have to pay for oil in the upcoming months regardless of market uncertainty.  The May contracts expire 10 days before May and that meant that once they expire the contract holder would have to be ready to receive a shipment that day. Given all of the shortages in storage, the price was forced to collapse due to this perfect storm of circumstances.