The Great Lockdown continues to turn markets on their head.

Last week, Visual Capitalist's Jeff Desjardins dug into the unprecedented number of initial jobless claims coming out of the United States, which topped 22 million in a period of four weeks.

It’s just days later, and we already have our next market abnormality: this time, traders were baffled by West Texas Intermediate (WTI) crude — the U.S. benchmark oil price — which somehow flipped negative for the first time in history.

How is that possible? And how does it tie into the COVID-19 oil price crash in general?

Setting the Geopolitical Stage

Oil is a geopolitical game, and big price swings always come with a geopolitical undercurrent.

This particular story picked up steam in February as OPEC+ producers tried to negotiate a production cut, amid concerns that COVID-19 could impact demand. Russia walked out on these meetings, and Saudi Arabia responded by undercutting oil prices by $6-8 per barrel.

The world went into lockdown, energy demand dissipated, and oil producers continued to pump at will. Then on April 9th, nearly a full month after COVID-19 was declared a pandemic, Russia and Saudi Arabia finally settled their differences.

However, this truce came too late — prices had already fell about 60% from February highs.

How Prices Went Subzero

Up until recently, this was a fairly run-of-the-mill oil price crash — but then prices suddenly sunk below zero, with May futures for WTI oil closing at -$37.63 on April 20th.

For the first time in history, producers were willing to pay traders to take oil off their hands. This oddity is partially a function of the particularities of futures contracts:

Buyers Wanted (At Any Cost!)

Futures contracts normally rollover to the next month without much happening, but in this case traders saw the May contract as a “hot potato”. No one wanted to be stuck taking delivery of oil when the world is awash in it and the country is in lockdown.

A Time and a Place

Oil futures contracts specify a time and place for delivery. For WTI oil, that specific place is Cushing, Oklahoma. With most storage capacity booked already, taking physical delivery wasn’t even an option for many players.

In other words, sellers outnumbered buyers by a crazy margin — and because oil is a physical commodity, someone has to ultimately take the contract.

At time of publishing, the May contract and spot prices have “rebounded” to about $10. The June contract is slightly higher, at $13.

“Never before has the oil industry come this close to testing its logistics capacity to the limit.” – International Energy Agency (IEA), Oil Market Report for April

Overcoming the Supply Glut

What do you do when oil is practically free?

You store as much of it as you can, and hope that at some point you can sell it for more.

Unfortunately, everyone has the exact same idea, and as a result there is a historic glut that is filling up the world’s storage capacity both on land and at sea:

In March, it was estimated that 76% of the world’s available oil storage capacity was already full.

A record-setting 160 million barrels of oil is being stored on tankers at sea, according to Reuters.

The cost of renting an oil supertanker has gone through the roof. It’s jumped from $20,000 per day to $200,000-$300,000 per day, according to Rystad Energy.

It remains to be seen how fast the transportation industry will recover in a post-COVID-19 world, but for now the outlook for all oil producers is grim. The continued fallout will not only affect industry, but also the countries that rely on oil exports to balance their budgets.