The NYMEX price for West Texas Intermediate (WTI) fell into negative territory on Monday, the lowest level ever recorded, and the only real question is why was anyone surprised by this turn of events?
Think about it: As much as we like to talk about renewables and the Green New Deal and all the other pop-culture things, the global economy still runs by and large on oil and natural gas. Demand for oil is entirely dependent on economic growth. As the U.S., China and well over 150 other countries have gone about closing down vast swaths of their economies to try to deal with the COVID-19 pandemic, some are estimating that economic growth in the U.S. for April could be negative 25-30%, and May isn’t looking to be much better.
The result of this negative economic growth has very predictably been a collapse of demand for crude, with some experts again estimating it to be in the negative 25-30% range for April. The consequence of that particular train wreck is that tens of millions of barrels of produced crude with nowhere else to go are flowing into storage facilities in the U.S. and across the globe. Given that the NYMEX price for WTI is set on a forward month futures contract, that negative price we saw on Monday is basically a projection of the market’s belief that U.S. storage will be completely full by May 20.
When that happens, many producers without market leverage will be faced with a choice between shutting in their wells or actually paying someone to take their oil away. We have to remember that wells drilled into some reservoirs can lose pressure and be difficult or impossible to restart once they have been shut-in.
Even worse, that negative price in effect becomes a bleak leading indicator of what traders think the state of the U.S. economy will look like in late May barring drastic changes. Looking at the gradual, staged plans most state governors are now rolling out to govern the reopening of their respective economies, no such drastic changes appear to be in the offing. Thus, we should expect these negative or single-digit prices for WTI to linger for days or even weeks before beginning to recover.