How Oil Prices Went to -$40.32: Explaining the COVID-19 2020 Oil Crash.
Updated: Dec 10, 2020
Futures markets are very interesting. Commodity prices can, did, and will go below zero as necessary. Because oil futures expire monthly, each contract only reflect the price of that specific month. So when April contract of crude oil went to -$40.32, May and June contracts were still trading around $20.
When each contract expires, the holder of the contract has to receive the physical product, otherwise high penalties will start to ensue. Since Covid-19 circumstances were so new, some speculators thought they could buy futures at $5, receive the physical product and store it for a month, then resell it at higher price next month. The problem is all storage were either spoken for or now it is 10 times the normal price. So speculators were forced to exit the contract at a loss as it is still cheaper than to receive physical product.
While I can go on about explaining the drivers behind the price going subzero, but I like to share the infographic below as it illustrate it in a simple yet beautiful way.
Source: Visual Capitalist
In the chart below you can see the price tanked on expiry day then returned to match next month price.
