US WTI Crude Hits $0 a Barrel, Goes Into Double Digit Negative Territory

© Flickr / Carsten ten BrinkBarrels of oil
Barrels of oil - Sputnik International
The slump in prices comes as traders brace for continued fallout from the economic downturn caused by the coronavirus, which has shut down most major economies around the world.

West Texas Intermediate, one of the world's main oil benchmarks, hit its lowest price ever in trading on the New York Stock Exchange on Monday, with futures for May delivery hitting $0 per barrel after 2 pm EST and going negative, to as low as -$34.87 per barrel as of about 2:30 pm, according to market data.

The benchmark is on track to its lowest-ever close since the inception of futures trading in 1983. The previous lowest-ever close of $10.42 was recorded on March 31, 1986, according to Jim Bianco of Bianco Research.

The unprecedented drop in prices is bad news for US shale producers, already battered by the two month long global economic freeze caused by countries' response to the COVID-19 crisis, and will impact other major exporters including Russia and Saudi Arabia, increasing the speed at which those nations eat through their rainy day reserves.

However, James L. Williams, president of Arkansas-based business management consultancy WTRG Economics, says the May futures data shouldn't be blown out of proportion, and may be an indication of an effort by traders to earn a quick buck.

"This is the second to the last day of trading for the April contract. The April contract expires tomorrow. The number of contracts outstanding is minimal this close to expiration. What you see is the effect of some traders taking advantage of the few still holding contracts. Forcing a margin call so they can buy at a low price. They probably have storage at Cushing and will buy April and sell June. They then take delivery on the April contract store it for a month and pocket the difference. Then they deliver the crude in June. They will make $15+ per barrel less the cost of a month's storage without risk," the analyst said, speaking to Sputnik as prices reached sub $10 a barrel.

According to Williams, June futures are a better representation of market sentiment regarding the benchmark's value. "To compare WTI and Brent. Brent for June is $25.64 and WTI for the same month is $20.94 as I write. When comparing Brent and WTI always use the same trading month. Today's trading in WTI for April is a non-event. However, the June contract shows WTI a little over $4.00 below Brent which is close the the shipping cost so the two markets are actually in line," he noted.

"Now the price is in negative territory. There is little available storage capacity at Cushing Oklahoma and traders holding the contract have to take delivery of the oil from June 1 - June 31. The negative price reflects that they will have to pay heavily to store the oil delivered," Williams later added.

The continued collapse in energy prices comes in spite of the historic agreement by OPEC+ and partner nations last week to cut oil output by some 9.7 million barrels per day (bpd) through June.

Crude prices began their roller coaster ride of wild drops six weeks ago, after the fateful OPEC+ meeting in Vienna on March 6, where Saudi and Russian energy ministers failed to reach an agreement on how much to cut prices by amid the COVID-19 pandemic. Riyadh added fuel to the fire sale by announcing deep discounts on its April contracts and promising to ramp up production by over 20 percent, from 9.7 million bpd to 12.3 million bpd. Russia and other countries followed suit in a bid not to lose market share, sparking an unprecedented glut amid flagging demand.

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