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Oil below zero: the day crude settled at −$37.63
On 20 April 2020, the price of US oil futures went below zero for the first time ever. At the close, sellers were paying $37.63 a barrel for someone to take oil off their hands.
The world before the drop
In early 2020, COVID-19 shut down much of the world. Planes stopped flying. Roads emptied. Factories paused.
Demand for oil fell off a cliff. Some estimates said world use dropped by more than a fifth in April.
At the same time, in March, Saudi Arabia and Russia fell out over production cuts and began pumping more oil, not less. By the time they agreed on big cuts in April, the world was already drowning in crude.
Oil had to go somewhere. Storage tanks began to fill up.
How oil futures work
US crude oil trades as a futures contract called WTI (CL on the CME). Each contract is for 1,000 barrels, delivered in a particular month to a storage hub in Cushing, Oklahoma.
Most traders never want real oil. They close or roll their contract to the next month before it expires. That's contract rollover.
But the contract is real. If you still hold it at expiry, you must take delivery of 1,000 barrels in Cushing. You need somewhere to put them.
In April 2020, there was almost nowhere left to put them.
What happened
The May 2020 WTI contract was due to expire on 21 April. In the days before, traders who held it without any way to store oil rushed to sell.
The trouble? Very few people wanted to buy. Anyone buying would need storage they couldn't get. The few who had space could name their price.
On Friday 17 April, the May contract settled around $18 a barrel.
On Monday 20 April 2020, it collapsed.
The moment everyone remembers
In the afternoon, the price fell below $0. It kept going. Around 2:30 pm ET it traded as low as about −$40 a barrel.
It settled at −$37.63. That's the first negative settlement in the contract's history.
A negative price sounds impossible. In plain words, it meant this: holders of the May contract were willing to pay someone $37.63 per barrel to take the contract, and the oil, off their hands.
Earlier that month the exchange had told members its systems could handle prices below zero. Many traders hadn't imagined they'd need that.
The next day the May contract expired, and the price of the June contract, which most of the market had already moved to, stayed positive.
Some traders who held the May contract through a broker lost far more than the money in their accounts. At least one large US broker reported losses of tens of millions of dollars from client accounts that went below zero.
What it teaches
1. Know what you're actually trading
The chart showed "oil". What traders really held was a contract with an end date and a delivery point. That detail decided everything on 20 April.
Before trading any futures market, learn its expiry and rollover rules. Read futures trading for beginners and our crude oil futures guide.
2. Liquidity dries up near expiry
On a contract's last days, most traders have already rolled to the next month. The few left can find almost no one to trade with. That's liquidity disappearing, and it can make prices jump.
Trade the "front" contract that most people are trading, and roll early. Your platform usually shows which month has the most volume.
3. "It can't go lower than X" is an assumption
Many people believed oil couldn't go below zero. It did. Floors you assume aren't floors. Your stop and your size are the only limits you control.
4. Size from the tick value, not the price
Oil futures move $10 for every 1-cent tick on a standard contract, and $1 on the micro. On a $20 move in a day, that's a lot of ticks. Check the numbers with the futures tick value calculator and size with the position size calculator.
What it doesn't mean
- It doesn't mean oil itself became worthless. Physical oil in other places, and later futures months, kept positive prices. This was about one contract's final day and full storage.
- It doesn't mean oil will go negative again. It took a rare mix: a pandemic, a price war and full storage, all landing on one expiry.
- It doesn't mean futures are a trap. Most futures traders never go near expiry. Knowing the calendar is part of the job.
- It doesn't mean oil funds caused it. Some blamed big oil ETFs. Later research found their trading had little effect on the negative price.
Timeline
| Date | Event |
|---|---|
| Early Mar 2020 | Saudi Arabia and Russia clash over output; prices fall |
| Mar–Apr 2020 | COVID-19 lockdowns cut oil demand sharply |
| 12 Apr 2020 | OPEC+ agrees record output cuts |
| 17 Apr 2020 | May WTI settles around $18 |
| 20 Apr 2020 | May WTI trades near −$40 and settles at −$37.63 |
| 21 Apr 2020 | May contract expires |
| Later in 2020 | Prices recover as demand returns and output falls |
Questions
Why did oil prices go negative in 2020?
Demand collapsed during COVID-19 lockdowns and storage at Cushing, Oklahoma, was nearly full. Traders holding the expiring May 2020 contract couldn't store oil, so they paid others to take it.
What was the lowest oil price in April 2020?
The May 2020 WTI contract traded as low as about −$40 a barrel and settled at −$37.63 on 20 April 2020.
Can oil prices go negative again?
It's possible in theory, and exchanges can now handle negative prices. It would take a similar mix of very weak demand and full storage at a contract's expiry.
What happens if you hold an oil futures contract until expiry?
You must take or make delivery of the actual oil, 1,000 barrels per standard WTI contract, at Cushing. Most traders close or roll before that, and many brokers force it.
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