Oil prices turned negative a year ago: This is what traders have learned since then

It’s been a year since the US benchmark West Texas Intermediate on the gross market made history trading and settling in negative territory, and while prices have recovered to be traded above previous COVID 19 levels, that day no will be forgotten soon.

“Last year proved that we did not see everything in the oil world,” Bjornar Tonhaugen, head of oil markets at Rystad Energy, said in an emailed comment on Monday. “Many failed to see the seriousness of what was to come,” including oil producers, the Organization of the Petroleum Exporting Countries and their allies, governments and analysts.

On April 20, 2020, the WTI contract for May of May 2020 decreased by 306%, or $ 55.90, per session, to settle at $ 37.63 per barrel on the New York Mercantile Exchange.

The one-day dive was the largest, based on records that began in 1983, and the settlement was the smallest recorded, according to Dow Jones Market Data, marking the first and only time a contract was closed with a negative value.

Read: Why oil prices have fallen into negative territory – 4 things investors need to know

Seeing prices turn negative, in part because of a “storage risk” that Rystad Energy and others had previously pointed out, “meant discovering a new market condition,” Tonhaugen said. “It was an oil Everest, but vice versa.” Oil prices not only hit bottom, but also broke it. ”

“Oil prices not only hit rock bottom, but they also broke rock.”

– Bjornar Tonhaugen, Rystad Energy

The negative prices were the result of “the market itself postponing an action plan, believing that the problem will go away on its own,” he said.

Producers did not want to stop production, hoping that low prices would not last long and OPEC + would not be able to agree on the policy immediately, Tonhaugen said. At the same time, “oil storage was filling up quickly, forcing oil companies to become floating deposits.”

“When the bubble was about to burst, panic also took over traders who could no longer take over and store any product they could no longer sell,” he said. They “tried to unload their commitments in excess, but no one wanted to buy.:

Overall, the negative prices were the result of the market “not being experienced and prepared for what’s to come,” because pandemics don’t usually happen more than once per generation or less, Tonhaugen said. But a pandemic could happen again, he said, and if oil demand “returns to red, now oil producers, OPEC and governments have the experience to deal with it.”

That makes another round of negative prices “unlikely,” he said.

Prices for WTI have since returned with the May CL.1 contract,
+ 0.14%

+ 0.14%
settling Monday at Nymex at $ 63.38 a barrel. Based on the previous month, prices have risen by almost 31% so far.

Meanwhile, Marshall Steeves, an energy market analyst at IHS Markit, described the historic drop in prices as the day the “bottom fell” from oil and said it came in the early days of the pandemic, when demand was “decimated. almost overnight due to global shutdowns that have taken place since March last year. ”

WTI oil prices were also facing an expiration of the contract pending the previous month, with the May contract expiring at the end of the next trading session. “It was the penultimate day of the expiring contract,” so open interest rates and volume fell, and so did liquidity, Steeves said.

It is “conceivable” that a decline in negative prices could take place again, he said, “given the particularities of delivery” to the Nymex delivery point in Cushing, Okla., In terms of pipeline and storage capacity. . He pointed out that there is a finite amount of pipeline capacity to transit crude to and from the warehouse at Cushing.

If an oil futures contract that expires soon saw a decrease in open interest rates and liquidity before expiration, the lack of liquidity could cause exaggerated price movements, but it is “difficult to predict such a situation in the absence of another event”. Global, such as COVID-19, Steeves said.

Looking ahead, “with the progress of the energy transition, it is conceivable that the volume of crude oil transactions could decline for centuries, as global demand moves to renewables,” he said. “But the situation may be a few years away at this time.”