US Crude Traded Below $0, Way Below

Just ahead of the close, West Texas Intermediate (WTI) traded at around a negative $28 a barrel. That means a seller would pay a buyer $28 a barrel to take the oil.

What’s happening is that the May futures contract expires Tuesday and oil that is not already in storage tanks has no place to go. But if a buyer should happen to have an empty very large crude carrier (VLCC) tied up at a Gulf Coast port that can accept a cargo of 2 million barrels, a seller with a storage problem would pay the buyer $56 million to take the barrels. That’s $20 million more than the value of the oil at last Friday’s closing price of $18.27 a barrel.

The going spot rate for a VLCC is around $150,000 a day. A buyer who thinks the price of WTI will rise to around $25 a barrel by June 1 would have to pay about $4.65 million to store the oil on a VLCC and sail it around in a circle until June 1. If the price for the June contract holds at around $22.60 a barrel, the 2 million barrels will sell for $45.2 million plus the $56 million the original seller paid the buyer to buy it minus the $4.65 million in floating storage costs. That’s a handsome profit indeed.

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Of course, at this late date, the odds of finding an empty VLCC are approximately zero so sellers are willing to pay the storage costs and if that means giving up the barrels, well, that’s ok too.

The seller is likely to be the manager of a leveraged (double or triple) fund that got caught standing at the end of the May contract when the music finally stopped.

We should see prices revert to something more recognizable on Wednesday when June becomes the front month for delivery. The Brent contract, which is already the contract for June delivery, traded down about 8.5% Monday at $25.70. That contract has been trading about $4 or $5 above the WTI contract for several weeks before widening the spread on April 3, following the front month Brent contract change to June delivery. Brent has been trading at $7 to $8 more than crude for the past few weeks.

The shock value of seeing WTI trade at negative $28 won’t disappear for a while. Seeing crude oil trade in negative numbers is not in anyone’s playbook.

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