It has been a year since the U.S. benchmark West Texas Intermediate crude oil futures made history by trading and settling in negative territory, and while prices have rebounded above pre-COVID 19 levels, that day will not be quickly forgotten.
“Last year proved that we hadn’t seen it all in the oil world,” said Bjornar Tonhaugen, head of oil markets at Rystad Energy, in an email comment on Monday. “Many did not see the seriousness of things to come,” including oil producers, the Organization of Petroleum Exporting Countries and their allies, governments and analysts.
On April 20, 2020, the WTI crude oil contract fell 306%, or $ 55.90, for the session in the first month of May 2020, to offset a negative $ 37.63 a barrel on the New York Mercantile Exchange.
The one-day plunge was the largest based on records going back to 1983, and the settlement was the lowest ever recorded, according to Dow Jones Market Data, the first and only time a contract of negative value was made.
Read: Why oil prices plunged into negative territory – 4 things investors should know
When prices turned negative, in part due to a “storage risk” that Rystad Energy and others had previously emphasized, “it marked the discovery of a new market circumstance,” said Tonhaugen. “It was an ‘oil Everest, but the other way round’. Oil prices not only hit rock bottom, but they also broke the rock. “
“Oil prices not only hit rock bottom, they also broke the rock.”
Negative prices were the result of “the market itself delaying an action plan under the assumption that the problem will go away on its own,” he said.
Manufacturers didn’t want to stop production, hoping that the low prices wouldn’t last long and OPEC + couldn’t agree on the policy right away, Tonhaugen said. At the same time, “the oil storage facility was filling up rapidly, forcing oil tankers to become floating storage.”
“When that bubble was about to break, panic took over and merchants could no longer accept and stock products they wouldn’t be able to sell,” he said. They “tried to get rid of their redundant pledges, but no one wanted to buy.”
Overall, the negative prices resulted from the market not being “experienced and prepared for what was to come,” as pandemics do not usually occur more than once per generation or less, Tonhaugen said. But another pandemic could happen, he said, and if oil demand “goes back to the red field, oil producers, OPEC and governments now have the experience to deal with it.”
That makes another round of negative prices “unlikely,” he said.
Prices for WTI have increased since, with the May contract CL.1,
CLK21,
checkout at $ 63.38 a barrel Monday on Nymex. Based on the first month, prices are up nearly 31% so far.
Marshall Steeves, energy markets analyst at IHS Markit, meanwhile, described the historic price drop as the day the “bottom fell out” of oil, saying it came in the early days of the pandemic when demand “went almost overnight. day was decimated as a result of global shutdowns that took place from last March. ”
WTI’s oil prices were also related to the contract expiring on the first month, with the May contract expiring at the end of the next day’s trading session. “It was the penultimate trading day of the contract expiring,” so interest and volume both declined and so did liquidity, Steeves said.
It is “conceivable” that there could be another drop to negative prices, he said, “given the peculiarities of the delivery” to the Nymex delivery point in Cushing, Oklahoma, in terms of pipeline and storage capacity. He pointed out that there is a finite amount of pipeline capacity to transport crude oil in and out of the Cushing storage.
If a soon-expiring oil futures contract experiences a drop in outstanding interest and liquidity before expiring, the lack of liquidity can cause exaggerated price movements, but it’s “ difficult to envision such a situation without another global event, such as COVID. -19, Steeves said.
Looking further ahead, “with the progress of the energy transition, it is conceivable that the volume of crude oil trade could undergo a secular decline as global demand for renewables changes,” he said. “But that situation could take several more years at this point.”