Oil's impossible day began no different from any other. Prices for both Brent, the benchmark under which two-thirds of the world's oil trades and it US counterpart West Texas Intermediate had been languishing in the low $20s for a while.
The US benchmark, which is a blend of largely light, sweet crude grades tested the teens over the last month, but the negative pricing scenario was largely scoffed at by most analysts. A major argument against negative pricing was that oil prices are not interest rates to slip into the negative.
However, specific crude grades in the US traded in the negative in the 2014-16 price slump as well as more recently indicating wider gloom for the markets. But April 20 was the first time a major international crude oil benchmark fell to zero and then into negative territory. Here's how it all happened.
Global fundamentals
The oil markets have been bearish since late January when the Covid-19 pandemic forced China, the world's largest crude importer, into lockdown.
The rapid spread of the virus to other parts of the world, which stopped air travel, land transportation and factory activity, took the steam from oil prices. Prices slumped to 70 per cent of their value from January by April.
Despite the backdrop of events, producers kept bringing more supply to the market, at a time when demand was set to fall by 29 million barrels a day in April. The collapse of the Opec+ talks in March led Gulf producers to pledge to bring more supply this month and a subsequent global pact to cut back output by 9.7m bpd does not kick in until May.
US market fundamentals
Against this backdrop, the US energy industry has come under the squeeze, with prices plunging to 18-year lows last week in spite of the historic pact by G20 countries and Opec+ to drawdown supply. The main reason for prices remaining low is record supply with limited storage options. That exacerbated the impact of the coronavirus and ebbing demand.
Producers needed to store even more crude as demand plummeted. What complicates the US energy landscape further is that much of the production is landlocked.
While the shale boom propelled the US to become the world's biggest oil and gas producer, pipeline and storage infrastructure failed to keep up with supply.
The US energy industry comprises thousands of independent producers who do not adhere to state-mandated protocols to increase or decrease supply, unlike other producers, particularly in the Middle East.
With US oil production looking for storage space, the energy department stepped up to buy oil to fill its strategic petroleum reserves. The department then considered paying the producers to keep their oil in the ground, a measure that would require the approval of the Congress, which is currently not in session. However, things would change very rapidly.
Meltdown
On Monday, WTI remained above $20 per barrel but quickly began to collapse. The May contract was due to expire on Tuesday, which in normal market conditions simply rolls over onto the next month with no dramatic consequences. WTI, unlike Brent, requires physical delivery of crude with the delivery point situated in the landlocked Cushing, in Oklahoma state in the south-central part of the US.
However, with storage tanks in Cushing known as the 'pipeline crossroads of the world' already at capacity or booked for storage, traders who held onto the contract found themselves unable to resell it. There were no takers for crude that didn't already have booked storage.
What followed was a dramatic unravelling of the oil markets. US crude plunged below $10 per barrel. The Chicago Mercantile Exchange, where WTI is traded said it would allow the benchmark to fall below negative, should prices nosedive further. WTI continued to fall with the price hovering at $1 in a couple of hours, the lowest it had reached until then.
The benchmark then rapidly collapsed below negative for the first time before falling even further, touching -$40 before settling at -$37.63 per barrel.
'Primal scream'
Daniel Yergin, a renowned oil historian who spent years documenting the rise of the US energy industry described the spectacular collapse of the May contract as a "a primal scream".
Stratfor's Greg Priddy, who described the price crash "an anomaly" cited interest from small-time investors in exchange-traded funds as having played a significant role in the rout.
"They may not have understood how the ETFs worked with the raw yield and the vulnerability at the end of the trading contract month so that's probably part of the story here," said Mr Priddy who is global energy and Middle East director at the consultancy. A particular ETF called USO has been singled out for blame as the fund owns front-end contracts which rolls over near expiry.
"Unless they change this or liquidate the fund - we'll probably see this again," said Viraj Patel, FX and global macro strategist at Arkera who anticipates a similar collapse around the expiry of the June contract next month.
The day after
While WTI rebounded on Tuesday to trade in positive territory just shy of $2, the benchmark tanked again below zero later in the day. Meanwhile the June contract, which had held above $25 in the previous session, collapsed to $16.20 by 3.56pm UAE time. WTI also dragged Brent to its lowest since 2002, with the benchmark collapsing 17.56 per cent to $21.08 per barrel.
What about Brent?
Unlike WTI, Brent, which accounts for two thirds of the world's trade in oil, is settled in cash not physical delivery. That makes it unlikely for the benchmark to fall into negative territory.
"I don't want to ever say no," said a cautious Mr Priddy. "A lot of strange things could happen with landlocked grades that are much harder to happen than on a globally traded delivery point," he said.
