Something quite unique happened to crude oil prices today (April 20, 2020): Prices for May 2020 delivery for West Texas Intermediate (WTI) reached an all-time low of negative $6.40/Barrel in intra-day trading whereas previous’ days prices closed at $18.27/Barrel as of Friday, April 17. This is not a typo. The price for May 2020 delivery in WTI as quoted by NYMEX reached a low of negative $40.32/Barrel as of 1:15 PM Central time.
Prices for delivery beyond May 2020 also decreased, but the one-day movement for these contracts is within the range of what we have seen over the past few months. Fundamental factors are decidedly bearish, with inventories quite full and the ability to take delivery of crude in May 2020 that expires tomorrow is extremely limited. Technical indicators are all pointing to strong sell signals, but the surprising movement to negative prices for May 2020 is best explained by financial positions being liquidated to avoid the cost of incremental collateral to maintain Futures positions, especially with just one more day of trading for this contract. It doesn’t make sense that producers will start paying for somebody to take their oil, this was more a signal of financial positions in WTI for next month’s delivery being liquidated. Other energy commodities such as natural gas, heating oil, or gasoline are also experiencing all-time lows. Still, their price movements were more within the normal range of what we have recently experienced.
Nassim Nicholas Taleb, in his book The Black Swan, describes this kind of price movement as an extremely rare event with severe consequences. As the trading progressed throughout the day, we had a clear view of his Black Swan, and it seems to have ignored our presence. It is too early to tell of the consequences of today’s events, but they will apply incremental financial pressure to companies such as midstreamers that were already suffering from historically low prices.
All views expressed by the author are solely the author’s current views and do not reflect the views of Concentric Energy Advisors, Inc., its affiliates, subsidiaries, or related companies. The author’s views are based upon information the author considers reliable. However, neither Concentric Energy Advisors, Inc., nor its affiliates, subsidiaries, and related companies warrant the information’s completeness or accuracy, and it should not be relied upon as such.