Crude oil futures for May delivery hit negative territory late Monday for the first time in history, then June futures dropped to $10 per barrel Tuesday, as the COVID-19 pandemic and a failure among oil-producing countries to cut production has led to a glut of crude oil.
After West Texas International (WTI) crude prices nearly hit a historic low of $17.31 per barrel late last week before eventually settling at $18.27, the benchmark price for crude oil in the U.S. dropped to negative $37.63 late Monday as May futures neared expiration, "leaving traders in a panic as they tried to avoid taking delivery of physical barrels," Bloomberg noted.
"A negative price for a futures contract is essentially an individual oil trader offering to pay another party to take the oil off their hands," wrote Mark Green with the American Petroleum Institute in a blog post. "No question, futures contracts are a clear sign of continued challenges for the energy industry."
While API and others credited a "technical oddity" having to do with paper contracts as one reason for the negative crude oil trading numbers, there's no denying that demand for diesel and gasoline has plummeted under stay-at-home orders. The issue leads back to the lack of storage space for the oil that is currently being produced in the U.S., according to a recent New York Time article. With people traveling less and less, the daily consumption of gas and diesel has dropped significantly, keeping the storage tanks filled.
WTI stores its crude oil in Cushing, Oklahoma, the largest oil storage facility in the country. The site is reaching capacity, which affects the future price of oil since there is no immediate storage, distribution or use of it, according to HFI Research and EIA. This could actually lead to traders to pay buyers to take the oil.
Some people are wondering why diesel prices haven't dropped more. The national average retail price of a gallon of diesel dropped to 2.48 last week, according to an April 20 report from the U.S. Energy Information Administration. That's down 2.7 cents a gallon from the previous week and 6.7 cents a gallon from a year ago. The cost of crude oil only makes up about 29% of the price of diesel as of March, according to EIA. With low demand, some refineries that turn crude oil into gasoline, diesel, jet fuel, and the like are idled or operating below capacity.
Even with OPEC and allies agreeing to drop oil production starting in May, the effort was not enough to fend off the effects of the global surplus and dropping prices. In a recent move, Saudi Arabia, which agreed to cut down production from 12.3 million barrels a day in early April to 8.5 million barrels a day beginning in May, has stated it could start the cuts immediately.
President Trump tweeted on April 21 that he was asking administration officials to “formulate a plan that will make funds available” to help the oil and gas industry, adding that he asked Congress for $3 billion to purchase oil for the Strategic Petroleum Reserve that wasn't included in stimulus package.