WTI started Monday's trading session at ~$18/bbl but fell towards a low of minus $39/bbl towards the end of the day. Whilst oil markets are oversupplied and the near-term outlook does not look encouraging, such a sharp sell-off cannot be explained by the fundamentals of global supply and demand alone. Below we try to set out the dynamic that is currently in play, starting from the basics:
Oil futures contracts relate to specific delivery periods. The current front month WTI contract is for crude oil delivered in May. However, this contract is close to expiry. At the end of Tuesday 21 April, the June contract will become the new front-month contract.
Unlike Brent, the WTI contract is settled through physical oil delivery, i.e. the owner of the contract on the day of expiry get barrels of crude. The oil market has a large number of financial players who cannot take physical delivery, so these participants will need to sell their forward contracts ahead of expiry to physical players who are in a position to receive those barrels.
The pricing point for WTI is a hub in Cushing, Oklahoma where this crude is traded and storage is usually available. According to the US Department of Energy, there was ~55 million bbl of crude oil stored near Cushing on 10 April. The oil market is sharply oversupplied, so inventories at Cushing are rising, currently at a rate of 6-7 mb per week.
The highest-ever amount of crude oil stored at Cushing is 69 mln bbl, which occurred in April 2017. With some capacity expansion since then, we estimate current total usable capacity at ~79 mln bbl. This means the remaining storage capacity will probably be exhausted in about four weeks. Starting from 10 April, this puts 'tank tops' in the middle of May. After that, there is probably no more storage capacity available.
The WTI contract that expires tomorrow deliver barrels precisely around that time. Financial players that still owned May contract have probably been eager to offload these, but without physical players with storage capacity, the bid in the market dried up, allowing prices to plummet to this deeply negative value.
Although oil prices are low, there is no easy way for financial investors to benefit from this. Only those who can take physical delivery can make a financial gain out of this. What the price action is telling you, is that there are very few market participants – if any – in that group anymore.
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