Negative oil prices mean producers will pay people to take their oil - Business Insider

For the first time in history, near-term contracts for US crude oil traded negative on Monday, falling to lows near -$38 a barrel. The coronavirus pandemic has cratered demand for fuels like gasoline, dragging demand for oil down with it. Storage tanks are filling up fast as a result. With nowhere for oil to go, the price is tanking into the red. That means producers could actually be paying people to take oil off their hands. Visit Business Insider's homepage for more stories.

For the first time in history, the price of near-term contracts for US crude oil traded negative on Monday, collapsing to lows close to negative $40 a barrel. Energy analysts have been suggesting that oil prices could go negative since they first crashed in early March, with the coronavirus pandemic cratering demand for fuel, as Business Insider previously reported. “I think we might see that happening going forward,” Per Magnus Nysveen, the head of analysis at the research firm Rystad Energy, said of negative prices on March 27. Click here to subscribe to Power Line, Business Insider's weekly clean-energy newsletter.But they didn't expect that the US benchmark, West Texas intermediate (WTI), would reach into the red — or at least not on the scale of what happened on Monday.

“It's like trying to explain something that is unprecedented and seemingly unreal!” Louise Dickson, an analyst at Rystad, said in a statement following the meltdown on Monday.

Oil pumps work at sunset on Wednesday, Sept. 11, 2013, in the desert oil fields of Sakhir, Bahrain.

AP/Hasan Jamali

Coronavirus has gutted global oil demandThe coronavirus pandemic has cratered demand for fuels like gasoline, as cities across the globe issue stay-at-home orders. Oil demand has fallen in turn. In April, global demand for oil is expected to be down by as much as 29 million barrels per day, or by about 30%, relative to last year, according to the International Energy Agency. To counterbalance that collapse and stabilize the market, more than a dozen top-producing nations agreed to pare back supply on the scale of 10-15 million barrels per day — or by as much as 15% — beginning in May. Yet even that historic agreement wasn't enough to stop prices from plunging negative.

Read more: Why the price of oil is continuing to free-fall after a historic supply cut — and when experts think it may finally reach rock bottomOn Monday, the futures contracts for US crude to be delivered in May tumbled, reaching unprecedented lows nearing negative $40. Contracts for oil to be delivered in June and July slid, as well, but remain in positive territory. When the price of oil goes negative it means that it's less than worthless. In fact, some producers might actually pay people to take oil from them, Nysveen said.Here's how that would work. How oil prices go negativeOnce oil is pumped out of the ground, it has to be stored and transported, which costs money.

And those costs can be higher in regions like the central US — relative to, say, Saudi Arabia — that are farther away from global markets, David Doherty, an oil analyst at the research firm BloombergNEF, said. When the price of oil crashes, producers may lose money on the sale of oil, simply because they can't recoup production costs. But in extreme cases like this, oil is hard for them to sell at all. With demand waning, oil reserves are starting to fill up — especially those in Cushing, Oklahoma, where WTI is delivered. “Traders have been gobbling up cheap oil and pumping storage full, and now, in the case of WTI and Cushing, storage has reached a physical limit,” Dickson said, noting that Rystad Energy estimates that there are only 21 million barrels of free storage remaining. With nowhere to put WTI oil, few people want to buy it. And that can turn prices negative, Nysveen said.

In this case, there are also market dynamics at play that sent the price deep into the red.Usually, when people refer to the price of oil they're talking about futures contracts — meaning, the price of oil that will be delivered at a later date.The oil that went negative on Monday was futures contracts for US crude oil to be delivered in May. Those contracts expire on Tuesday, so on Monday traders were rushing to sell them so they don't end up with oil they can't store.

The price of contracts for near-term US crude oil fell to about negative $40 on Monday

Markets Insider

Producers will pay people to take their oilThe price of US crude to be delivered in June and July was still well into positive territory on Monday. But if the price of oil stayed negative, it would be cheaper for many producers to give oil away — or pay people to take it off their hands — than it would be to store it themselves.

“They will not be able to sell their oil because no one will take it,” Nysveen said, referring to the case in which the price of oil continues to deteriorate. “Then they actually have to pay someone to take that oil.” You might be wondering: Why don't producers just shut down the well until prices go back up？Nysveen said it's not that easy. In some cases, turning off the tap can “destroy” the resources, he said. “It's not always possible to turn down oil production,” he said. What negative prices mean for companies and consumersCheap oil means cheap gas. On Monday, the average cost of gasoline in the US was just $1.80, according to AAA.

But just because May futures are worthless doesn't mean gas will be, too. June and July contracts — selling for about $21 and $27 a barrel, respectively — are a better indicator of longer-term prices. Nonetheless, the extraordinary prices on Monday spell bad news for US oil and gas companies, which require prices closer to $40 a barrel to turn a profit. “Now that we have reached this threshold, the next logical step will be shut-ins and bankruptcies,” Dickson said. Read more: How 18 oil giants from Exxon to Halliburton are cutting staff and slashing spending in response to the historic oil price meltdownOne large exploration and production company — Whiting Petroleum — has already filed for bankruptcy. And Rystad estimates that even in $20-per-barrel territory the number of Chapter 11 cases could reach 140 this year and increase to nearly 400 in 2021.