Price of oil contracts drops below zero; demand has collapsed

An oil rig stands against the setting sun in Midland, Texas on Friday, April 17, 2020. (Odessa American/Eli Hartman)

The Associated Press

Health experts warn the pandemic is far from over and new flareups could ignite if governments rush to allow "normal" life

NEW YORK (AP) — Oil futures plunged below zero on Monday, the latest never-before-seen number to come out of the economic coma caused by the coronavirus pandemic. 

Stocks and Treasury yields also dropped on Wall Street, with the S&P 500 down 1.8 percent, but the market's most dramatic action by far was in oil, where the cost to have a barrel of U.S. crude delivered in May plummeted to negative $37.63. It was at roughly $60 at the start of the year. 

Traders are still paying $20.43 for a barrel of U.S. oil to be delivered in June, which analysts consider to be closer to the "true" price of oil. Crude to be delivered next month, meanwhile, is running up against a stark problem: traders are running out of places to keep it, with storage tanks close to full amid a collapse in demand as factories, automobiles and airplanes sit idled around the world. 

Tanks at a key energy hub in Oklahoma could hit their limits within three weeks, according to Chris Midgley, head of analytics at S&P Global Platts. Because of that, traders are willing to pay others to take that oil for delivery in May off their hands, so long as they also take the burden of figuring out where to keep it.

"Almost by definition, crude oil has never fallen more than 100 percent, which is what happened today," said Dave Ernsberger, global head of pricing and market insight at S&P Global Platts. 

"I don't think any of us can really believe what we saw today," he said. "This kind of rewrites the economics of oil trading."

Also exacerbating the volatility is that few traders are buying and selling U.S. oil to be delivered in May. They won't even have the opportunity to do so after Tuesday, when trading contracts for it expire and the earliest delivery they'll be able to buy is for June. 

The plunge in oil sent energy stocks in the S&P 500 to a 3.7 percent loss, the latest in a dismal 2020 that has caused their prices to nearly halve. 

Halliburton lurched between gains and sharp losses, even though it reported stronger results for the first three months of 2020 than analysts expected. The oilfield engineering company said that the pandemic has created so much turmoil in the industry that it "cannot reasonably estimate" how long the hit will last. It expects a further decline in revenue and profitability for the rest of 2020, particularly in North America.

"The government can declare whatever they want in terms of encouraging people to get out and do stuff," said Willie Delwiche, investment strategist at Baird. "Whether or not broad swaths of society do that remains to be seen. It's going to take seeing people start to get out and do stuff again. That will be the necessary positive development, not just declaring getting things open." 

But health experts warn the pandemic is far from over and new flareups could ignite if governments rush to allow "normal" life to return prematurely. 

"There's still uncertainty surrounding the reopening of the economy," said Julian Emanuel, chief equity and derivatives strategist at BTIG. "Come fall, are we going to be back on airplanes? Are we going to go out and eat?"

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