The Day Oil Cost Less Than Nothing

At 2:08 p.m. Eastern on April 20, 2020, the May contract for West Texas Intermediate crude settled at minus $37.63 a barrel — the first negative settle in the contract's 37-year history. Earlier the same day it had traded at $17.73. The collapse happened in the last hour and a half of the session before expiry.

A WTI futures contract is not really a bet on the price of oil. It is an obligation: whoever holds it at expiration must take physical delivery of 1,000 barrels at Cushing, Oklahoma. Almost no one wants that. About 99 percent of contracts are closed out before expiry by selling to someone who does — usually a refiner, a trader with storage, or a fund rolling into the next month.

In April 2020, COVID lockdowns had cut global oil demand by roughly a fifth in a few weeks. The CFTC's interim report later flagged that Cushing's 76 million barrels of working storage were already 76 percent full, and the realistic share available to new takers was much smaller. Refiners had nowhere to put more oil. The traders holding May contracts could not deliver and could not find a counterparty who could. To exit, some of them paid buyers to take the position off their books.

The CFTC reviewed the day and declined to call it manipulation. Chairman Heath Tarbert said the staff "simply cannot provide" a definitive cause. The mechanics were the cause. A futures contract that physically settles only works if there is somewhere to physically settle it. For one afternoon at Cushing, there wasn't, and the price did the only thing left to do.