US Oil Market Freakishly Trades Negative

April 23, 2020

This week saw a first for the oil industry.

Already trading at historically low prices, on Monday the WTI plunged to negative numbers and traded at -40/barrel. Fortunately, the next day saw a return to positive, albeit pitiful, numbers.

How can this be possible?

COVID-19 lockdowns have caused a sharp decline in oil demand, and are the single biggest contributor to the current oil crisis in the US. As a significant portion of the country stays at home in compliance with government regulations, cars -and airplanes- are parked. Most airline carriers are down 35 – 65%. However, oil is still coming out of the ground, and oil storage capacity has become increasingly scarce.

WTI futures contracts for May 2020 delivery were set to expire on April 21. This is why, on April 20, market participants that were unable to take physical delivery of product at expiration, or find a buyer for the contract, were led to pay to exit the contract.

Is negative the new normal?

While it is certainly possible that oil should trade negative again, it is unlikely to become the new normal. Presuming the lockdowns will lift in the coming weeks, demand is expected to increase and oil will once again be worth something. How fast and how strong the comeback will be remains to be seen.

Although there hasn’t been an immediate impact to downstream chemical markets, CORECHEM is continuing to monitor the situation as it develops. Certain chemicals that would normally follow the price slump in crude are likely to be propped up by high demand due to the COVID-19 pandemic. On the flip side, the pandemic has caused large portions of the economy to essentially ‘dry up’, and chemicals primarily used in these areas are experiencing the same shortage of storage space as crude. It is possible that chemicals will see both unprecedented highs, and all-time lows, in the coming months.

To discuss any questions or concerns about how this may affect your company, please feel free to get in touch with your sales representative.