How Did Oil Prices Become Negative?

The COVID-19 pandemic sent shockwaves through the oil and gas industry, but nothing shook the industry quite like WTI futures slipping into negative territory in late April. At their lowest, prices for West Texas Intermediate reached a historic -US$37 per barrel. So how did such a valuable benchmark commodity take such a drastic dip?

According to a recent report issued by the U.S. Commodity Futures Trading Commission abnormally high open interest in West Texas Intermediate was one of the major drivers. Combined with an unexpected drop in demand caused by the coronavirus pandemic and a global shortage in storage space, the high open interest sent prices on a downward spiral.

High open interest triggers price plummet

On April 2 open interest in WTI hit 634,727 contracts, a significant increase from the 12-month average of 430,000 contracts. As traders scrambled to offload their positions on May contracts the price of WTI plunged below zero. By late April, a storage crisis and severe slump in demand caused the benchmark to hit lows of -US$37.

“The intraday WTI destruction today is certainly epic in scale, which is largely a case of jitters ahead of the WTI May 2020 futures contract expiring tomorrow and storage fears finally materialising,” commented Rystad Energy Louise Dickson as the disaster unfolded. “But if you have been watching the physical spot prices in the North Sea, currently trading in the $15-18 range, this drop in WTI May 2020 futures isn’t as shocking.”

EIA hopes for US$49.70 average in 2021

Despite the turmoil of 2021, the mood for 2021 is more buoyant. This year EI analysts expect WTI to reach an average of US$49.70. While the price is relatively low due to the ongoing issue of the coronavirus pandemic, there are no indicators WTI could once again slip into negative territory. The benchmark will continue to lag behind Brent crude, which is expected to average US$53 per barrel in 2021 and 2022.

“EIA forecasts West Texas Intermediate (WTI) crude oil prices will average about $3/b less than Brent prices in 2021 and $4/b less than Brent prices in 2022. This price discount is based on EIA’s assumption that the current reduced discount of WTI to Brent of $2/b on average in the second half of 2020 reflects significant declines in U.S. crude oil production and reduced available volumes of U.S. crude oil for export to distant markets relative to other global benchmarks,” reads a report issued by the EIA.

Find out more about the latest oil and gas trends in ‘The intersection of sustainability and tribology’ featuring insight from Dr. Raj Shah, David Phillips, Dr. Mathias Woydt and Mr. Nathan Aragon on behalf of Koehler Instrument Company.