Oil Traders Want a (Temporary) Fracking Ban

By Matthew Klein |  Monday, April 20

Oil spill. Stock markets were down across the board today, with particularly large losses among companies most vulnerable to coronavirus including retailers, casinos, and real estate. By contrast, companies that traders think will thrive in the age of a contagious disease, such as Shopify (payments tech for online retailers) and Flir Systems (which makes thermal imaging cameras that can potentially detect fevers) are doing great. The Dow Jones Industrial Average lost 2.44% on the day, with only 2 of the 30 components (IBM and Cisco Systems) rising on the day.

Consistent with the risk-off mood, interest rates edged lower and the dollar edged higher. The yield on the 10-year U.S. Treasury note hit 0.625% today, which is almost back to the all-time low of 0.501% reached on March 9.

But the really exciting news was that the price of a barrel of West Texas Intermediate crude oil went negative today, dropping from $18.27 to -$37.63. That may seem strange, but the explanation is simple: today was the last chance traders had to sell the May 2020 WTI futures contract and avoid taking delivery of oil that has no place to go. There isn’t enough storage capacity for crude right now, and if you can’t store a toxic and dangerous chemical, it’s worth paying a lot of money not to have to worry about it. Prices simply reflect this basic reality.

Planes are grounded, cars are staying off the road, and industry is grinding to a halt. Refinery output has collapsed even as oil drillers keep pumping the black stuff out of the ground, which means the unprocessed crude has been piling up in tank farms across the country. According to the U.S. Energy Information Administration, stocks of crude oil held in tank farms in Cushing, Oklahoma rose by 42% between March 20 and April 10.

As of April 10, the latest date for which we have data, tank farms in Cushing were 69% full, up from just 49% full on March 20. Cushing is the main hub for trading WTI and it’s safe to assume the situation has gotten worse since then. If nobody wants to refine oil now, and if you can’t store crude for when people want it later, the fair value of any additional crude you pump out of the ground has to be less than zero.

Nobody thinks negative oil prices are a permanent condition. The futures price of June WTI is $20.43 a barrel, while the price for July WTI is $26.28. Oil demand is much lower now than it was a couple of months ago, but it isn’t zero. If enough producers shut down, even temporarily, new oil supply will be too low to meet demand and the crude in the tank farms will get burned up, freeing up space for future storage.

More importantly, most people think oil demand will eventually recover once the virus is under control. Brent crude, which is the main oil benchmark outside the U.S., is currently trading at $25.57, because the balance between supply, demand, and storage is so different in Europe and Asia.