Why Oil Futures Went Negative in April 2020
On April 20, 2020, a contract for American crude oil settled at minus US$37.63 a barrel. At that price, if you took the buying side, the economics ran backward: you were being paid to take on the obligation to receive oil. But there was a catch. You needed a way to take delivery of 1,000 barrels in Cushing, Oklahoma. A brokerage account was not going to help you find a tank.
The next day, the same contract expired with a positive settlement price. The world had not suddenly found a use for all that oil. What changed was the price of a very particular obligation as the deadline approached. That distinction explains how something useful can acquire a negative price without the rest of the market following it below zero.
The date was part of the product
West Texas Intermediate, or WTI, is a benchmark for U.S. crude oil. The futures contract in question specified more than a price and a grade. Each contract represented 1,000 barrels, with delivery at Cushing under exchange rules. The contract that went negative was for May 2020 delivery and stopped trading on April 21. The headline on April 20 was therefore about a particular kind of oil, in a particular place, on a particular timetable.
Most futures traders never take delivery. A trader who bought a May contract can sell an equivalent May contract to close the position. An investor who wants to keep exposure can close May and buy June, a process known as rolling. The roll is two trades, not a change of date on a reservation. If May is cheap and June is expensive, switching months means selling the cheaper exposure and buying the dearer one.
Physical delivery is precisely what gives the futures price its connection to the actual commodity. If futures and deliverable oil diverge enough, firms with access to the physical market can trade the difference. But the ability to do so rests on pipelines, tanks, financing, and people who know how to arrange delivery. The contract can change hands in seconds. Those capabilities cannot.
The empty tank that wasn’t available
The pandemic had cut travel and fuel consumption sharply. Refineries reduced their demand for crude, and oil continued arriving into a system with fewer outlets for it. As inventories built, taking another barrel became less a question of what it might fetch eventually and more a question of where it could go now.
It is tempting to say Cushing simply ran out of space. The U.S. Energy Information Administration drew a more useful distinction: some capacity was physically unfilled, but some of that space may already have been leased or committed. A tank can look empty in an inventory report and still be unavailable to the trader who needs it. What mattered at the deadline was usable, uncommitted capacity, not the gap between two headline numbers.
Even a firm able to find room would have to assess transport, financing, and the price at which it could sell later. Buying crude for less today and selling a more expensive futures contract for a later month can make sense if the difference pays for carrying the oil. The catch is in the word if. A profitable-looking spread is of little use when you cannot secure the storage on which the trade depends.
When the people who must sell outnumber the people who can buy
A negative futures quote is easier to understand from the point of view of someone already holding the contract. On Friday, April 17, the front-month settlement was US$18.27 a barrel. Suppose a trader entered at that price and closed at Monday’s minus US$37.63. The difference is a loss of US$55.90 per barrel, or US$55,900 for one 1,000-barrel contract, before fees. The fact that the exit price was negative does not turn an earlier long position into a windfall.
Why would anybody take the other side? Imagine a firm with a confirmed place to put the oil and a route to sell it later. Its economics are different from those of a financial trader facing delivery with neither. One sees a discounted input and the possibility of a resale. The other sees a deadline and a bill it cannot reliably estimate. The same barrel can have opposite values to those two firms.
That asymmetry helps explain why the usual buyers did not automatically put a floor under the market. The pool of firms able to take on the physical obligation was narrower than the pool of traders that could buy the contract earlier in its life. Near expiration, a market can be easy to enter in normal conditions and brutally expensive to exit under stress. The U.S. Commodity Futures Trading Commission’s staff published an interim report on the episode in November 2020; the storage-and-expiration story explains the economics without claiming to account for every trade that day.
Why the gas station did not pay you to fill up
The May WTI contract was neither a quote for gasoline at the pump nor a price for every barrel of crude on Earth. Later WTI contracts remained positive. The EIA reported that June Brent closed at US$19.33 a barrel on April 21. Other U.S. physical crude prices were mixed: some fell below zero, while others remained positive. The point is not that negative pricing was imaginary. It is that the conditions that made it possible did not apply everywhere at once.
The months were telling different stories. May priced the immediate difficulty of accepting delivery. A later contract gave the market more time for demand, production, or storage conditions to change. That difference could be economically real even if both quotes appeared on the same screen under the word “oil.” And a gallon of gasoline has its own costs, including refining and distribution, long after the crude contract has changed hands.
What to check before using a benchmark
A practical test is to take any market price written into a contract and ask what someone would actually have to deliver to get it. Which instrument and month? At what location? At what cutoff? What happens if trading is disrupted or if the quote goes negative? An oil-linked supply agreement, a commodity hedge, and a lender’s collateral model may all use the word “WTI” while referring to different prices and different obligations.
There is also a difference between hedging a future expense and being able to fund the hedge along the way. Futures are marked to market, so an unfavorable price move can create a cash requirement before a business realizes the offsetting benefit on its physical purchases or sales. The timing gap matters even when the hedge works economically over its full life. Stress tests should cover both the price on the screen and the cash and operational capacity needed to carry the position.
Most days the words “a barrel of oil” are precise enough for the news. On April 20, 2020, the missing words were the whole story: in Cushing, for May delivery, with somewhere to put it. A benchmark price is only as general as the obligation behind it.
Important sources
U.S. Energy Information Administration, Analysis of negative WTI futures prices: https://www.eia.gov/TODAYinENERGY/detail.php?id=43495
U.S. Energy Information Administration, Daily WTI front-month futures prices: https://www.eia.gov/dnav/pet/hist/RCLC1D.htm
CME Group, Delivery of WTI futures: https://www.cmegroup.com/education/courses/introduction-to-crude-oil/crude-oil-fundamentals/delivery-of-wti-futures
U.S. Commodity Futures Trading Commission, Interim staff report announcement: https://www.cftc.gov/PressRoom/PressReleases/8315-20