The Day Oil Traders Paid $37 a Barrel to Get Rid of It

On the afternoon of 20 April 2020, the May contract for West Texas Intermediate crude oil traded on the New York Mercantile Exchange settled at minus $37.63 a barrel. Earlier in the day it had touched minus $40.32. Whoever was still long that contract was offering to pay anyone who would relieve them of the obligation to take delivery of the oil — and even at $40 of cash per barrel handed over, there were not enough takers.

WTI is a physically settled contract. If you hold it through expiry, you must accept actual barrels of crude in Cushing, Oklahoma, the small town where the pipelines meet. In normal months only about 1 percent of contracts ever reach delivery; the rest are closed out for cash. April 2020 was not a normal month. COVID lockdowns had crushed US refinery throughput by roughly 4.1 million barrels a day — about a quarter of demand — between mid-March and mid-April. Oil kept coming out of the ground anyway. Cushing's 76 million barrels of working storage filled toward the brim; by 17 April it was already 76 percent full, and the steel tanks left no slack for the May barrels still to be delivered.

The May contract was set to expire the following day. Holders without storage were trapped. They could either rent space they did not have, or pay someone else to assume their position. Selling a futures contract at a negative price is the second option: you pay the buyer for the privilege of escaping the trade. By the closing bell the spot market for WTI had cleared at numbers that no commodity exchange had printed in 37 years of the contract's existence. The June contract opened the next morning back above twenty dollars.