On Monday 20th April 2020, something extraordinary happened, something never seen in the history of commerce; you could buy American West Texas Oil at a negative price: The sellers were going to pay you to take the stuff away, and you would not be paid just a little, but a whopping $40 a barrel to be the buyer.
Just a few weeks ago, the same oil contract would cost the buyer $50 a barrel. Normally – that is in the entire history of oil trading – the buyer pays. Yesterday the seller paid the buyer. In the time that Covid took to shut down the economy, the price of a barrel of oil had collapsed in price by $90.
The loss for producers, shippers, traders, refiners and retail sellers can only be imagined.Thousands of companies will be going bankrupt as we speak.
How could this have happened?
America is using so little oil that it is running out of places to physically store it. You could not give it away yesterday.
There are different contracts for oil; for delivery today, delivery next month, delivery in a year’s time; and for different types of oil – jet fuel, light crude oil etc – and for delivery in different places, the main ones being Brent for delivery in Europe and West Texas for delivery in Cushing, Oklahoma.
Yesterday was the last day of trading for the contract to be delivered in May. No one wanted to take delivery. Who wants a pile of oil with no buyers and nowhere to store it. Oil is not like wood or potatoes – you cannot dump a few tanker loads in your garden shed.
Oil has become a ‘hot potato.’