Why Did Oil Prices Go Below $0?

The Tsunami in crude oil futures yesteday is one for the record books. Oil did something on Monday that made even market veterans shake their heads in wonder. The soon-to-expire May contract for West Texas Intermediate crude on the NYMEX traded, and closed, in negative territory. Negative pricing for physical commodity futures only occurred once before in modern times. We will soon post a blog about that incident that took place 65 years ago in Chicago. Stay tuned!

Tom Kloza has been a commodities professional for 40 years. He heads market analysis for Oil Price Information Service. Minutes before the close, he had something to say. “Nobody, whether they’re 120 years old or 20 months old, has ever seen an oil price lower than this.”

The oil price collapse is of course due to the COVID-19 pandemic and lack of global demand as businesses are shut down.

The West Texas Intermediate May crude contract that fell more than 100% on Monday. The pandemic is causing unprecedented demand loss. Storage tanks are quickly filling. There is no demand for this contract expiring Tuesday. 

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

This is an extremely unique set of circumstances: the pandemic hit the oil industry very hard. Vehicle use has plunged. People aren’t driving or flying. In turn, this has led to oil storage tanks being near capacity. An analyst at RBC Capital Markets said, “We’re expecting Cushing (in Oklahoma) to reach tank tops by mid-May.” He added that his firm will maintain its bearish sentiment until gasoline demand improves.

Only last week, there was an historic OPEC cut in crude production. Those cuts don’t take effect until May 1st. Currently there are huge volumes of crude in tankers on the water, all headed to refineries that do not need it.

Greenhouse Gases and Pollution Only Temporarily Reduced

Lower oil prices are, of course, good for the American consumer, by lowering gasoline prices. However, I do have one concern. That is, potential complacency by major oil companies and other businesses to continue investing in renewable energy alternatives.

The current drop in oil demand combined with the Saudi-Russia oil price war has simultaneously, if temporarily, lowered greenhouse gas emissions (GHG). However, the drop in GHG emissions is likely to be unsustainable in the long term, and the currently low cost of oil has raised questions about the future of clean energy deployment and climate action

According to a scientist at NASA–“This is the first time I have seen such a dramatic drop-off over such a wide area for a specific event,” Fei Liu, an air quality researcher at Nasa’s Goddard Space Flight Center, said in a statement.

Once Again, Europe Doing Things The Right Way

With respect to renewable energy development. There are conflicting views on how low oil prices might inspire more investment into alternative energy. This article discusses the situation in Europe, which is still positive for renewable energy advancements.

Governments could chart a path to a fully decarbonized energy system by the middle of the century and revive economies hit by the virus if they tailor stimulus packages to boost clean energy technologies.

With governments adopting massive stimulus packages to blunt the shock of the virus, calls are building for a “green recovery”. Last week, 180 European politicians, companies and lawmakers urged the EU to align economic rescue with climate goals.

I certainly hope we “stay the course” of transitioning away from oil and coal to more solar, hydropower and other green technology sources. Up until this pandemic, we seemed to be more on the right course.

Low Oil Prices and Ideal Spring Weather Pressuring Corn Futures

Finally, with respect to commodities, low oil prices have been shutting down US ethanol plants. The combination of ideal spring Midwest planting weather is not a good sign for US corn farmers. Without a summer drought, corn futures could be heading to $3.00 or lower.