WTI crude oil price turns negative

WTI is a type of crude oil used as a standard in crude pricing and as a commodity for oil futures contracts on the New York Mercantile Exchange (NYMEX).

At the beginning of the year, WTI crude oil was priced above $60.

By the time of the liquidity crisis we experienced in early March 2020, WTI crude oil had already experienced a sharp correction from $45 to $20 in a fortnight.

Since then, the price of WTI crude oil has remained between $20 and $30.

And then, on Monday, April 20, 2020, the unthinkable happened, WTI crude oil inevitably approached zero. Yet we are used to say that a tangible asset cannot fall to zero.

In a world where everything turns upside down, this becomes possible.

After falling below zero, WTI crude oil price continued to fall ineluctably to finally hit a low of -38 dollars :

This exceptional phenomenon can be explained via the futures contracts system.

Several months ago, investors committed themselves to acquire barrels of WTI crude oil at a certain price on 20 April 2020. Their bet was that the average price of the barrel at the end of the contract would be higher than the one fixed at the time of its signature in order to realize a capital gain.

Unfortunately for them, with the coronavirus crisis, global demand is almost nil. In addition, storage space has become extremely scarce and expensive in the United States.

On Monday 20 April 2020, as the expiry of the May futures contracts was approaching, investors with these contracts had no choice but to get rid of them at all costs.

Indeed, the last holder of the contract at the time it expires finds himself with the barrels of oil on his hands.

Since there were no buyers left, the prices thus arrived in negative territory with a drop of more than 200% in a single day. An incredible situation that calls into question all beliefs in this world where nothing seems to work anymore.

In the aftermath of this historic day, Donald Trump split from a tweet in which he specified that he intended to support the American oil industry adrift by mobilizing an enormous amount of public money if necessary:

Based on the June futures contract, the price of WTI crude oil has regained some color since then, but it remains dangerously low at $14 as we are on April 22, 2020, with one month to go before it expires.

An intervention of the American authorities is therefore essential. Once again, it is the American citizens who will have to foot the bill, with an increase in the U.S. public debt to be expected.