Blog Post

Insight: What Negative Oil Prices Really Mean

By: Thomas Holst

Note: The opinions expressed are those of the author alone and do not reflect an institutional position of the Gardner Institute. We hope the opinions shared contribute to the marketplace of ideas and help people as they formulate their own INFORMED DECISIONS™.

COVID19 has threatened both livelihoods and lives as well as causing surprises in energy markets. West Texas Intermediate (WTI) crude oil prices sank into negative territory on April 20 for the first time in history (see Figure 1). How could negative crude oil pricing happen and who are the beneficiaries?

Two economic shocks caused energy prices to trend lower. First, crude oil markets suffered a supply shock when oil glutted the market because of a dispute between Saudi Arabia and Russia over global market share. Second, a demand shock created by COVID-19 reduced consumption of motor gasoline and jet fuel. Too many barrels of crude oil overwhelmed diminishing demand.

Figure 1: Cushing, Okla., WTI Spot Price, 1986–2020

Source: U.S. Energy Information Administration/Thomson Reuters

Did the intrinsic value of WTI go negative on April 20? No. An explanation of the crude oil trading market will explain the negative crude oil pricing phenomenon.

On one hand, crude oil trades on a physical market in which buyers and sellers exchange barrels of WTI crude oil by pipeline, rail, or ship.

On the other hand, in parallel with the physical market, a “paper” crude oil market trades on the Chicago and New York Mercantile Exchanges for the benefit of speculators and hedgers (i.e., people seeking to lay off risks of price changes). Each “paper” contract requir