US Oil Price Dropped Below Zero: Questions, Answers, and Impact on Crypto
Hello, fellow readers. Today, we have an unusual topic for this blog. We’re going to talk about oil and the unprecedented thing — negative rates of crude oil futures. This situation is critical to the global economy, including the crypto world. That’s why Superorder wants to dive a bit deeper and find out reasons, consequences, and effects. We will try to keep it as simple and illustrative as possible. Sit back and let’s go!
What Happened Exactly?
On April 20, the spot price of Western Texas Intermediate (WTI) crude oil moved from around $20 per barrel to $0 and further to –$37.63, according to CME Group. In other words, owners of oil were ready to pay buyers. Only one type of contract was negative — NYMEX-based CLK20 or May futures. These contracts expired on April 21, so market players wanted to get rid of oil and the related obligations.
You can read about futures contracts in more detail in our guide.
Why Rates Plunged?
The situation may look ridiculous but it’s not, actually. April 21 was the day of the expiration of May crude oil futures. What’s more important, these contracts were deliverable futures. It means that, after expiration, owners of the contracts would have to actually receive all these real barrels of oil and store them somewhere. Now, you may wonder what’s the problem with getting and storing oil.
A small city of Cushing, Oklahoma, is the main American oil hub. WTI futures are linked to Cushing reservoirs, too. Sellers had to provide the necessary storage space after the expiration of contracts. The problem? On April 17, 60 out of 72 million barrels of tanks in Cushing was full of oil on April 17! Thus, it was nearly impossible to store new products, considering that certain space is always reserved for long-term contracts.
That’s why it was more profitable for sellers to get rid of futures even at a negative price than to find ways to store oil.
Is This Situation Unique?
Yes, definitely. This drop is an unprecedented situation. Since the very beginning of WTI futures trading in 1983, rates never moved to zero or below. Earlier, oil companies and intermediaries were repurchasing their own contracts back. Only 1% of all deals resulted in real deliveries, according to the US Energy Information Administration.
This April, the situation was different. Companies already got their profits because they sold futures. And they didn’t need real oil because storages were full of it. Hence, traders weren’t able to return contracts to oil giants but they also didn’t need real oil. It’s a form of the corner in trading but based on the negative rate.
What Are the Results?
Apart from the first-ever negative rate of WTI, other prices changed heavily, too. June futures contracts dropped from $20 to roughly $11 per barrel but then returned to $17. Other benchmarks like Brent plunged, as well. Overall, despite relatively low volume, the news caused the serious psychologic effect, attracted the attention of many people around the world, evoked various forecasts, including the potential rates below –$100.
How Oil Volatility Affects the Crypto World?
During the historic 300% drop in oil prices, the crypto industry faced a much softer decrease. For instance, Bitcoin decreased by just 4% but then broken the triangle pattern and surged heavily above $7,500. Such high oil volatility caused a lot of jokes in the crypto community which pointed out that cryptocurrencies are much stabler now. Other members noted that the BTC price was never negative.
On April 20, one Bitcoin was worth more than 600 barrels of oil. Crypto insiders stated that this day will change the entire landscape of global finance. Some experts think that oil discredited itself as one of the most reliable stores of value. BTC and other coins may take the lead. Considering that Bitcoin is competing with dollars and gold, it has pretty high chances to finally enter the cohort of big global assets.
