Khan Capital | April 2020
Key Takeaways
- WTI crude oil settled at negative $37.63 on 20 April 2020, the first time oil futures traded below zero, as demand destruction collided with storage exhaustion at Cushing, Oklahoma.
- Global demand collapsed by approximately 29 million barrels per day while the Russia-Saudi price war flooded the market with additional supply.
- The CFTC documented that the negative price was a futures market phenomenon driven by physical delivery mechanics at expiration, not the physical oil market’s equilibrium price.
- Commodity ETFs like USO amplified the dislocation and exposed retail investors to structural risks many had not understood.
- OPEC+ cuts of 9.7 million barrels per day addressed barely a third of the demand gap, meaning the inventory overhang would take quarters to draw down.
Part of: Market Crises & Crashes – Khan Capital’s hub on market crashes and financial history.
On Monday 20 April 2020, the May contract for West Texas Intermediate crude oil settled at negative $37.63 per barrel. Oil was trading below zero. Sellers were paying buyers to take physical delivery of crude. The immediate cause was a convergence of collapsing demand, overflowing storage, and the mechanical dynamics of futures contract expiration. But the deeper significance extends far beyond a single day’s settlement price.
How Oil Went Below Zero
WTI futures contracts are physically settled at Cushing, Oklahoma. By April 2020, global oil demand had collapsed by approximately 25-30 million barrels per day. Cushing’s storage was 76% full and remaining capacity was either already leased or prohibitively expensive. With the May contract expiring on 21 April, traders holding long positions faced a panicked liquidation.
The CFTC’s interim report documented that the price fell from $17.73 to negative $37.63 in a single session. The negative price reflected the cost of storage at that moment: the value of the oil itself was positive, but the cost of storing it exceeded that value.
The Demand Collapse
The IEA estimated that April 2020 demand was approximately 29 million barrels per day below year-earlier levels. Aviation fuel fell over 70%. US gasoline demand dropped approximately 50%. Even the historic OPEC+ cuts of 9.7 million barrels per day addressed barely a third of the demand gap.
The Russia-Saudi Price War
The storage crisis was exacerbated by the Russia-Saudi price war that erupted on 6 March when OPEC+ negotiations collapsed. Saudi Arabia slashed selling prices and announced plans to increase production to over 12 million barrels per day. For several weeks, the world’s two largest oil exporters were simultaneously flooding an already oversupplied market.
What the Market Is Misunderstanding
Negative oil was a futures market phenomenon, not a physical market phenomenon. The negative price applied only to the May WTI contract in the final hours before expiration. The June contract never went negative, though it fell below $12.
The ETF structure amplified the problem. The United States Oil Fund (USO) held enormous positions in the May contract, and academic research found that the Russia-Saudi Arabia price war and speculation on oil futures played a critical part in the collapse.
US shale production will decline, but not disappear. Shale production is more flexible than conventional oil. The industry will emerge smaller and more disciplined but will remain significant.
Implications for Investors
Commodity ETFs carry structural risks that equity ETFs do not. Contango, roll costs, and delivery constraints create tracking error that can devastate returns even when the underlying commodity recovers.
Energy equities are pricing a recovery that has not yet occurred. Investors should favour companies with the strongest balance sheets and lowest break-even costs.
The OPEC+ framework has been tested and survived, barely. Future cohesion cannot be taken for granted.
Conclusion
Negative $37.63. The number will be remembered as the day the oil market broke: pandemic-driven demand destruction, geopolitical price warfare, storage exhaustion, and futures market mechanics converging in an outcome no model had contemplated.
Sources: US Energy Information Administration, CFTC, Bruegel, Wikipedia, PMC (Academic Research)
The Khan Capital Brief
Understand what moves markets
Analysis like this, free in your inbox. No spam, unsubscribe any time.
Related Reading
Negative oil prices were a direct consequence of the demand collapse covered in COVID-19: The Fastest Bear Market in History. For the Fed’s response to the broader crisis, see Fed Goes Nuclear. For a later oil supply shock driven by conflict, see Oil Above $100: Strait of Hormuz Crisis. The price war that preceded the negative oil event is examined in the Russia-Saudi oil price war.
For the fundamentals behind this story, start with how ETFs and index funds work and OPEC+ and spare capacity.
Leave a Reply