Cathy Bussewitz

The Associated Press

NEW YORK – The world is awash in oil, there's little demand for it and we're running out of places to put it.

That in a nutshell explains Monday's strange and unprecedented action in the market for crude oil futures contracts, where traders essentially offered to pay someone else to deal with the oil they were due to have delivered next month.

The price of U.S. benchmark crude that would be delivered in May sold for about $15 a barrel Monday morning but fell as low as -$40 per barrel during the day.

“It’s the worst oil price in history, which shouldn’t surprise us, because it’s the inevitable result of the biggest supply and demand disparity in history,” said Ryan Sitton, commissioner at the Texas Railroad Commission, which regulates the state’s oil industry.

Efforts to limit the spread of the coronavirus have major cities around the world on lockdown, air travel has been seriously curtailed, and millions of people are working from home, leading to far fewer commuters on the roads.

But pumps are still running, extracting oil from the ground, and all that oil has to go somewhere.

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Has the price of oil gone negative before?

Sometimes, the price on the future delivery of oil will get skewed by a surprise event, say an oil pipeline rupture. That can cause the price of a futures contract for a given month to be sharply higher or lower than that of the futures contract for the next month.

Usually, this is smoothed out by the market, but the sharp pullback in demand combined with a glut of oil led to a dearth of oil storage capacity. That made it hard for traders with contracts for crude delivery in May to find buyers, which sent the contract price into negative territory.

“This has never happened before, not even close,” said Tim Bray, senior portfolio manager at GuideStone Capital Management in Dallas. “We’ve never seen a negative price on a futures contract for oil.”

Are oil companies paying people to take away their crude?

That does not appear to be widespread.

Many analysts described the dip in crude oil prices as technical, related to the way futures contracts are written. Most buyers are purchasing oil that would be delivered in June, not May.

Even so, there were more than 150,000 of those futures contracts that traded hands, enough volume to make it meaningful, said Ryan Fitzmaurice, energy strategist at Rabobank.

“In my view, today’s move was more technical in nature and related to the futures contract expiration,” Fitzmaurice said. “We could see isolated incidents where oil companies pay people to take their oil away as storage and pipeline capacity become scarce, but that is unlikely on a sustained basis.”

What's going on with oil storage?

Far less gasoline and jet fuel are being consumed, and oil tanks are starting to fill up. Experts warned that global storage could fill up in late April or early May.

That's led some producers to decide to move oil now, because the space may become more valuable than the oil, Sitton said.

“There’s so much oversupply, and storage is fulling up,” Sitton said. “Eventually, you go to a point where literally there’s so much of a valuable commodity in the world that the commodity no longer has value. And that’s what we’re seeing.”

Where will the oil go?

The federal government is negotiating with companies to store crude oil in the Strategic Petroleum Reserve. If all the storage tanks are full, oil companies will shut wells, which can damage oil fields. Many tankers are full of oil and floating at sea.

Why didn't the OPEC deal fix this?

This month, OPEC and its allies, under political pressure from the U.S. government, agreed to cut production by nearly 10 million barrels per day – about 10% of global output. Some analysts said the deal didn't go far enough to curb massive oversupply. It kept prices from falling further for the time being, but there's still too much oil in the world.

How will this affect the price of gasoline?

Cheap oil leads to cheaper prices at the pump, which are often viewed as a boon for consumers. The average price in the USA for a gallon of regular gasoline fell to about $1.49 or less, more than $1 less than a year ago, according to AAA.

“Typically when oil prices fall, gasoline prices fall, and that benefits consumers,” said Jim Burkhard, vice president at IHS Markit. "But prices are falling today because hardly anyone is driving, they’re driving a lot, lot less. So it’s difficult for anyone to take advantage of these lower gasoline prices if they’re not driving. So there’s no winner in this situation today.”

Contributing: Terry Chea in Alameda, California, and Alex Veiga in Los Angeles