February 2, 2023


Born to perform

Oil Prices Go Negative, but No One Is Going to Pay You to Drive

3 min read

Xinhua News AgencyGetty Images

  • For the first time in history, on April 20 crude oil prices fell below zero because of cratering demand, in part due to the coronavirus pandemic.
  • We couldn’t help wondering, where could we store this oil that someone theoretically would pay us to take?
  • The situation is only temporary, of course, and futures for June are forecast to be back in the $20-a-barrel range.

    Yesterday, the price of oil fell to negative $37.63. Which means what you think it means, under a very specific circumstance: Somebody would’ve paid you to take delivery of crude oil next month. The only catch is, you’d need someplace to put it. And the storage tanks are all full up, which is what caused this unprecedented situation in the first place.

    The oil futures market might be a little bit arcane, but everybody understands supply and demand. Right now, demand for crude oil is way down. Planes aren’t flying, cars aren’t driving, consumers aren’t buying the petrochemical doodads that pervade modern life.

    Which has caused a bit of a snag in Cushing, Oklahoma, the staging area for crude oil pumped from the Permian Basin. When the pumps keep pumping but the demand stops demanding, the storage tanks get filled to the rim and abstract financial instruments run headlong into physical reality. And that’s why May futures contracts for West Texas Intermediate crude, which is piped to tanks in Cushing and traded on the Chicago Mercantile Exchange, went negative.

    If this had happened in the 1970s, you know it would’ve spawned a madcap Burt Reynolds caper involving a tanker truck and a hijinks-filled run to Oklahoma.

    In each contract, there’s a “settlement day,” when the parties arrange for the physical pickup of oil. Today is that day. Which meant that yesterday, a lot of traders started freaking out, because much of the action in the futures market comes from people whose closest experience with crude oil was the time that restaurant used canola instead of EVOO in their shrimp scampi. These people do not want to fire up their tanker trucks and head to Cushing, because they don’t have any tanker trucks. If you have money invested in Hormel, you don’t expect them to call you up and say, “So when are you picking up these 28,000 cases of Spam?” Hence, negative $37.63.

    That’s per barrel of oil. Each barrel contains 42 gallons, which yields about 20 gallons of gasoline and 12 gallons of diesel or heating oil. That 20-gallon figure is a common number to fill up a full-size pickup or SUV, which puts the absurdity of the situation in stark relief. Imagine getting paid nearly $40 to fill your tank. That’s not going to happen, unless you were in position yesterday with your own storage tanks and a backyard refinery, but that’s where the market was heading for a few crazy hours. If this had happened in the 1970s, you know it would’ve spawned a madcap Burt Reynolds caper involving a tanker truck and a hijinks-filled run to Oklahoma.

    Rest assured, the opportunity to pick up negative-priced oil was a temporary aberration. June’s futures are around $20 per barrel, and they go higher further into the summer. But negative prices actually happened, and somebody bought crude oil for less than free.

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