April 21, 2020

The Price of Oil Didn’t Fall to -$40 Yesterday

Sure, that looks like a lot of storage. But it's mostly already spoken for.Shane Bevel/ZUMAPRESS

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We’ve all had our fun, but after watching the evening news today I have to ask: Everyone knows that the price of oil didn’t really fall to negative $40 yesterday, right?

All that happened was that the price of one particular futures contract fell below zero. This contract comes due on Tuesday and requires the buyer to take physical possession of the oil. Unfortunately, thanks to the COVID-19 oil glut, there’s little storage available and its price has skyrocketed. Under these extreme conditions, taking delivery of the oil and buying storage for it would be a guaranteed huge loss. This caused many investors and speculators to panic and dump their contracts at any price—even if they had to pay someone to take it off their hands.

Anyway, that’s it. The price of one particular futures contract, late in the day, was a victim of panic selling. The price of oil in general was largely unaffected. It’s still dropping, mind you, but not in any kind of dramatic way.

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